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Author: 


Liesse,  Andre 


Title: 


Evolution  of  credit  and 
banks  in  France  from.. 

Place: 

Washington,  D.C. 

Date: 

1909  [1910] 


MASTER   NEGATIVE  * 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


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r»'JSINESS 

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v,15 

mother 
copy. 


Liesse,  Andre,  1854- 

...  Evolution  of  credit  and  banks  in  France  from  the 
founding  of  the  Bank  of  France  to  the  present  time,  by 
Andre  Liesse . . .     Washington,  Govt,  print,  off.,  1909  [1910] 

267  p.    fold.  tab.    23"".     (U.  S.    61st  Cong.,  2d  sess.    Senate.    Doc.  522) 

At  head  of  title :  National  monetary  commission. 

Issued  also,  1911,  in  Publications  of  National  monetary  commission, 
vol.  XV.     [no.  li 


1.  Banks  and  banking — France.    2.  Credit — France. 
I.  U.  S.     National  monetary  commission,    ii.  Title. 


Library  of  Congress 


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,32k1, 


3.  Finance — France. 


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\    No.  522 


NATIONAL  MONETARY  COMMISSION 


.■^ 


Evolution  of  Credit  and  Banks 

in  France 

From  the  Founding):  of  the  Bank  of  1    nnce 
to  the  Present  Time 


BY 


ANDRE   LIESSE 

PROFESSOR  AT  THE  CONSERVATOIRE  NATIONAL  Dt:     .       H  ET  MF/'JfeRS 
ANU  AT  L'ECOLE  DES  SClENChS  POLITIQUES.— MEj\.  -  '  R   OF  T 
INSTITUT  ;NTtRNAllONAL  Dr   STA'I  ISTluUt ,  h  IC 


Washington  :  Government  Printing  Office  :  1909 


#^ 


.1 


^W 


// 


t 


Columbia  (Hnitoe  wftp 

mtfteCilpofUrtogdtk 


LIBRARY 


School  of  Business 


I 


61ST  Congress  ) 
2d  Session      } 


SENATE 


f  Document 
\    No.  522 


NATIONAL  MONETARY  COMMISSION 


Evolution  of  Credit  and  Banks 

in  France    ^ 

From  the  Founding  of  the  Bank  of  France 
to  the  Present  Time 


BY 


ANDRE  LIESSE 

PROFESSOR  AT  THE  CONSERVATOIRE  NATIONAL  DES  ARTS  ET  METIERS 

AND  AT  L'ECOLE  DES  SCIENCES  POLITIQUES.— MEMBER  OF  THE 

INSTITUT  INTERNATIONAL  DE  STATISTIQUE.  ETC. 


Washington  :  Government  Printing  Office  :  1909 


_iiu-5. 


5 


d 


TABLE  OF  CONTENTS. 


NATIONAL  MONETARY  COMMISSION. 


Nelson  W.  Aldrich,  Rhode  Island  Chairman. 
Edward  B.  Vrbbi«and,  New  York,  Vice-Chairman. 


Julius  C.  Burrows,  Michigan. 
EuGBNB  Halb,  Maine. 
Philander  C.  Knox,  Pennsylvania. 
Thbodore  E.  Burton,  Ohio. 
John  W.  Daniel,  Virginia. 
Henry  M.  Tbllbr,  Colorado. 
Hernando  D.  Money,  Mississippi. 
JosBPH  W.  Bailey,  Texas. 


Jesse  Ovrrstreet,  Indiana. 
John  W.  Weeks,  Massachusetts. 
Robert  W.  Bonynge,  Colorado. 
Sylvester  C.  Smith,  California. 
Lemuel  P.  Padgett,  Tennessee. 
George  F.  Burgess,  Texas. 
Ars&nb  p.  Pujo,  Louisiana. 
Arthur  B.  Shelton,  Secretary. 


A.  Piatt  Andrew,  Special  Assistant  to  Commission. 


Lex 


Page. 
Preface :  Purpose  and  arrangement  of  this  study 5 

Part.  I. 

THE   BANK  OF   FRANCE  AND  THE  DEVELOPMENT  OF  CREDIT,  1800 

TO  1848. 

Introductory y 

Chapter  I. — Founding  of  the  Bank  of  France 16 

II. — The  charter  or  privilege  of  the  Bank  of  France — Crisis 

of  1805 26 

III. — The  fundamental  statutes  of  the  Bank  of  France — It 
comes  into  closer  relations  with  the  State,  1806- 
1814 — Panic  of  1814 ^ 32 

IV. — ^The  Bank  under  the  Restoration — ^Founding  of  depart- 
mental banks _ 43 

V. — ^The  Bank  under  the  Monarchy  of  July — Founding  of 
comptoirs  or  branch  offices,  and  the  competition  with 
departmental  banks 47 

VI. — ^The  beginnings  of  th^  railroad  industry — The  panics  of 
1846,  1847,  1848 — The  departmental  banks  of  issue 
are  incorporated  with  the  Bank  of  France,  which 

becomes  the  sole  bank  of  issue 54 

VII. — A  brief  survey  of  the  general  course  of  business  in  the 
first  half  of  the  nineteenth  century  in  France — 
Credit  and  industrial  beginnings 66 

Part  II. 

THE  BANK  OF  FRANCE— THE  CREDIT  MOBILIER— THE  FIRST  COMP- 

TOIR  D'ESCOMPTE. 

Introductory gj 

Chapter  I. — The  Bank  of  France,  sole  bank  of  issue — Its  operations 
with  the  State — Founding  of  establishments  called 
"Haute  Banque" — Industrial  loans  and  speculation.         83 
II.— The  Soci6t^  G^n^rale  du  Credit  Mobilier  and  the  Pereires, 

i853-i866__ _ 96 

III. — ^The  first  Comptoir  d'Escompte  and  the  development  of 
commerce — The  laws  of  May  23-29  and  July  24, 

1867,  on  companies 109 

IV. — ^The  Bank  of  France  from  1 860-1 875: 

I.  Before  the  Franco-Prussian  war 125 

II.  The  Franco-Prussian  war  and  its  results 137 

III.  The  great  loans  and  the  payment  of  the  war 

indemnity 150 

3 


^'k^ 


V 


National    Monetary     Commission 


Part  III. 

FROM  1875  TO  THE  PRESENT  TIME. 

Page. 

Introductory - — i6i 

Chapter  I. — The  situation  of  France  after  the  war — A  glance  at  the 

development  of  saving  and  savings  institutions 165 

II. — ^The  crises  of  1882  and  1889 — A  brief  outline  of  the 
operations  of  the  Bank  of  France,  1 875-1 889 — The 

Comptoir  d'Escompte 170 

III. — ^The  crisis  of    1890-91 — Intervention  of  the  Bank  of 

France  in  behalf  of  the  Bank  of  England _       187 

IV. — ^The   credit   companies   and    their   development — Ex- 
tension of  their  operations — ^Their  general  method — 

Their  present  situation 193 

V. — ^The  credit  companies  and  the  local  banks 217 

VI. — ^The  Bank  of  France — Renewal  of  its  privilege — Present 

situation — Its  r61e  in  the  crisis  of  1906-7 224 

General  conclusions __ — - -       235 

Appendices. 

I. — Note  on  the  Credit  Foncier  de  France 241 

II. — Note  on  the  Credit  Agricole  Mutuel  _. 255 


PREFACE. 

The  object  of  this  study  is  to  afford  a  connected  view 
of  the  basic  facts  and  most  noticeable  features  of  the 
credit  system  and  banks  in  France  from  the  year  1800  to 
the  present  time.  It  is  designed,  therefore,  not  as  a  history 
in  which  multipUcity  of  detail  is  apt  to  obscure  a  view  of 
the  subject  as  a  whole,  but  as  a  coordinated  outline  of  the 
successive  stages  in  the  development  of  credit  and  of  the 
institutions  which  distribute  it. 

This  outline  is  divided  into  three  very  unequal  periods: 

The  first — a  period  of  beginnings,  of  slow  growth,  Of 
formation,  during  which  the  Bank  of  France  succeeds 
in  gaining  a  complete  monopoly — extends  from  the  foun- 
dation of  that  establishment  until  about  1848. 

The  second  and  shorter  period  is  a  time  of  transition. 
It  extends  from  1848  to  about  1875.  During  these 
twenty-five  years  new  institutions  and  new  forms  of  credit 
associations  make  their  appearance.  Better  laws  facili- 
tate the  organization  of  these  credit  associations  as  well 
as  of  all  kinds  of  associations,  both  industrial  and  com- 
mercial. It  includes  the  war  of  1870-71  and  its  immedi- 
ate results.  This  event  seems  to  have  hastened  the 
development  of  the  credit  system  or  at  least  to  have 
given  it  a  stimulus,  arising  from  the  consequent  reaction 
against  the  misfortunes  which  had  overwhelmed  the 
country.    France  begins  to  recover  and  finds,  in  her  sturdy 


National    Monetary    Commission 

spirit  of  economy  and  her  ability  to  save,  the  elements 
productive  of  new  vigor  and  potency. 

The  third  period,  which  might  be  called  the  period  of 
full  maturity,  extends  from  1875  to  the  present  time.  In 
this  interval  the  organization  of  the  credit  system  is  put 
on  a  firm  footing  as  the  result  of  a  centiuy's  evolution. 

In  this  evolution  the  various  critical  movements  are 
described  and  explained — the  political,  economic,  and 
financial  crises — constituting,  as  it  were,  the  pathological 
growth  of  the  credit  system  and  banks  in  France. 

The  study  is  supplemented  by  the  addition  of  two 
appendices,  of  which  the  first  portrays  the  development  of 
the  Credit  Foncier  and  its  results,  while  the  second  out- 
lines the  rather  recent  organization  of  the  Credit  Agricole; 
thus  completing  a  series  of  observations,  impartially  set 
forth,  and  designed  to  assist  speciaHsts  seeking  the  solu- 
tions of  problems  along  these  lines. 

Andr6  I/IESSE. 

Paris,  March  jo,  igog. 


EVOLUTION  OF  CREDIT  AND  BANKS 
IN  FRANCE  FROM  THE  FOUND- 
ING OF  THE  BANK  OF  FRANCE 
TO  THE  PRESENT  TIME. 


Part  I. 


THE  BANK  OF  FRANCE  AND  THE  DEVELOPMENT 

OF  CREDIT,  1800  TO  1848. 

EVOLUTION   AND    DEVELOPMENT   OF   CREDIT  AND   CREDIT 
INSTITUTIONS  IN  FRANCE  FROM  THE  YEAR  1800. 

INTRODUCTORY. 

Law's  bank.— The  bank  compromised  in  certain  undertakings.— Failure  of  Law's 
bank  and  "system."— The  liberty  of  issuing  bank  notes  in  France  from  1721  on.— 
The  Caisse  d'Escompte.— Dangerous  relations  of  the  Caisse  d'Escompte  with  the 
State.— Its  difficult  situation.— Its  liquidation.— Commercial  banks  during  the  Rev- 
olution.—Prudence  of  the  commercial  bankers.— Founding  of  free  banks  of  issue, 
1796-1800.— The  Caisse  des  Comptes  Courants,  1796.— Conditions  of  discount.— 
Its  issues.— A  difficulty  overcome.— The  Caisse  d'Escompte  Commercial,  1797.— 
Origin  and  nature  of  this  establishment.— Capital.— Issue.— The  Comptoir  Com- 
mercial, 1800.— General  Commercial  Association  of  Rouen,  1798.— Services  per- 
formed by  these  banks  of  jssue  during  the  last  few  years  of  the  eighteenth 
century. 

The  son  of  a  Scotch  banker  named  Law  succeeded  in 
obtaining  from  the  Regent  on  May  2,  1716,  permission  to 
organize  a  bank  of  issue.  It  was  called  the  Banque 
Generate,  and  was  opened  the  following  month.  If 
Law,  the  president  of  the  bank,  had  kept  within 
the  normal  bounds  of  operations  of  banks  of  this 
kind,  it  is  probable  that  he  would  have  rendered  a 
real  service  to  commerce  and  industry.  Instead  of  this, 
he  soon  associated  the  bank  with  vast  and  uncertain 


National    Monetary    Commission 


enterprises  aimed  at  the  exploitation  of  the  colonies; 
and  presently  the  Banque  G^n^rale  was  brought  into 
closer  relations  with  the  State,  and  on  Jime  4,  1718,  took 
the  name  of  the  Banque  Royale.  All  the  departments 
of  private  and  public  finance  fell  into  Law's  hands.  The 
issue  of  bank  notes  by  the  bank  and  the  issue  of  shares 
by  the  different  companies  that  he  founded  soon  became 
an  abuse.  Neither  bank  notes  nor  shares  represented  in 
reality  any  certain  value.  Stock-jobbing  and  wild  specu- 
lation hastened  the  downfall  of  what  was  called  Law's 
system.  The  Banque  Royale  closed  its  doors  in  1 721,  and 
the  various  companies  founded  by  Law  were  liquidated  at 
great  loss.  It  was  a  disaster  which  caused  the  ruin  of  a 
large  number  of  people.  The  memory  of  this  failure 
remained  fresh  in  the  minds  of  all  classes  of  people,  even 
the  poorest,  during  the  whole  of  the  eighteenth  centtuy, 
and  it  was  a  long  time  before  any  one  dared  to  found 
another  bank  of  issue. 

Although  the  monopoly  which  Law  had  obtained  from 
the  Regent  in  1716,  namely  the  exclusive  right  to  issue 
bank  notes,  had  been  abolished  in  1721  by  an  edict  which 
gave  the  right  of  free  issue. 

Not  until  fifty-five  years  later  did  anyone  try  to  organize 
a  bank  of  issue;  even  then  the  establishment  was  not 
called  a  bank,  so  closely  was  the  name  associated  with 
Law's  failure.  On  March  24,  1776,  when  Turgot  <»  was 
Minister  of  Finance,  Planchaud  and  Clouard,  the  first  a 
Swiss,  the  second  a  Scotchman,  founded  a  bank  of  issue 


o  In  1767  an  attempt  was  made  to  found  a  bank  of  issue  to  which  the 
name  of  Caisse  (TEscompte  was  already  given,  but  as  a  matter  of  fact  it 
did  not  go  into  operation. 


Evolution     of    Credit     and     Banks 


imder  the  name  of  Caisse  d'Escompte,  This  concern 
was  chartered  as  a  limited  liability  partnership  {sous 
forme  de  commandite),  and,  after  some  difficulties  at  the 
start,  succeeded  in  doing  a  moderately  good  business. 
However,  it  was  not  long  before  the  Comptrollers  of  Fi- 
nance, d'Ormesson  first  and  afterwards  Calonne,  being 
short  of  money,  borrowed  from  it.  From  this  moment 
dates  the  first  blow  to  the  soundness  of  the  credit  of  the 
Caisse  d'Escompte.  Except  for  these  dangerous  rela- 
tions with  the  State,  the  Caisse  d'Escompte  engaged  in 
a  normal  and  regular  banking  business,  including  the 
issuance  of  bank  notes.  But  repeated  state  loans  and 
government  interference  in  its  management  completely 
altered  its  character.  Yet  the  directors  were  men 
of  ability  and  worth;  Lavoisier,  the  celebrated  chemist, 
was  one  of  them.  The  National  Assembly,  which  had 
just  convened,  spent  much  time  discussing  the  imder- 
taking.  Mirabeau  was  always  unfriendly  to  it,  while,  on 
the  other  hand,  Dupont  de  Nemours  tried  to  defend  the 
true  principle  of  banks  of  issue,  asserting  that  a  bank  with- 
out a  privilege,  not  involved  in  business  relations  with  a 
debt-ridden  and  needy  State,  without  the  prerogative  of 
forced  currency,  can  not  do  otherwise  than  pay  in  coin  on 
demand  the  value  of  every  note  issued. 

Soon  the  Caisse  d'Escompte,  as  a  result  of  closer  and 
closer  relations  with  the  State,  became  nothing  more 
than  a  branch  of  the  pubUc  administration  of  finance, 
until,  deprived  of  the  resources  it  had  been  counting  on, 
it  appealed  to  the  Government  to  take  its  affairs  in  hand 
and  offered  to  give  the  Minister  of  Finance  a  statement 
of  its  assets  and  liabilities.     Apart  from  the  one  error 

9 


National    Monetary    Commission 


of  forming  an  alliance  with  the  Government,  the  Caisse 
d'Escompte  had  made  every  possible  effort  to  protect  the 
interests  of  its  chents.  For  some  time  the  State  had  been 
issuing  assignats  or  paper  money  through  the  emergency 
bureau  (Caisse  de  V Extraordinaire).  Issues  of  bank 
notes  and  assignats  were  in  competition.  The  paroxysms 
of  the  Revolution  completed  the  disorganization  of  the 
Caisse  d'Escompte.  Several  of  its  administrators — La- 
voisier, Vandemier,  and  others — mounted  the  scaffold,  and 
lastly  Cambon  issued  a  decree  suppressing  the  institution 
altogether.  Its  liquidation,  begim  in  1793,  was  not  fin- 
ished until  the  time  of  the  First  Empire.  It  is  needless 
to  add  that  the  stockholders  lost  the  greater  part  of  their 
investment.     The  Caisse  d'Escompte  lasted   seventeen 

years.  ^ 

The  cause  of  its  downfall  is  to  be  sought  in  the  abnor- 
mal political  events  which  succeeded  each  other  at  that 
time.  However,  in  all  that  concerns  proper  banking  op- 
erations, the  Caisse  d'Escompte  was  wisely  administered, 
and  would  have  been  of  real  service  to  commerce  if  it 
had  not  allowed  itself  to  become  the  State's  banker, 
lending  money  to  the  State  without  sufficient  security, 
and  receiving  nothing  in  return  but  privileges  which 
could  not  fail  to  be  disastrous  to  it. 

The  revolutionary  disturbances  gradually  subsided.  A 
reaction  set  in,  vigorous  in  proportion  to  the  violence  of 
the  political  and  social  upheaval  which  had  gone  before 
it.  Although  France  emerged  from  this  long  ordeal  ex- 
hausted and  disorganized,  business  had  not  been  utterly 
destroyed.    The  transactions  necessary  for  the  barest  sub- 


to 


Evolution     of    Credit     and     Banks 

sistence  of  the  citizens  gave  employment  to  commerce  and 
industry,  and  made  some  sort  of  credit  necessary.     Com- 
mercial banks,  engaging  only  in  discount  operations,  collec- 
tions, and  running  accounts  (comptes  courants) ,  had  quietly 
and  steadily  kept  on  in  spite  of  the  Reign  of  Terror,  the 
ordeal  of  the  wars,  and  the  dangerous  and  ruinous  flood 
of  assignats.    Many  of  these  banking  houses  were  very  old. 
That  of  the  Mallets,  which  is  still  in  existence,  was  founded 
in  1723.     These  bankers  were,  for  the  most  part,  Protes- 
tants whose  famines  had  taken  refuge  in  Switzerland  after 
the  revocation  of  the  edict  of  Nantes.     Among  them  was 
Perregaux,  of  Neufchdtel,  who  employed  as  a  clerk  Jacques 
Laffitte,  and  made  him  his  successor;  then  too  there  was 
Vernes,  who  toward  1772  had  in  his  employ  Necker,  after- 
ward Minister  of  Finance.    These  bankers  had  learned  the 
art  of  credit  and  the  handling  of  capital  in  Switzerland, 
chiefly  at  Geneva,  where  banks  had  always  been  pros- 
perous.    They  maintained  the  course  of  current  business, 
and,  as  we  shall  see,  were  always  extremely  prudent,  even 
in  dealing  with  Napoleon.     They  did  not  allow  themselves 
to  be  cajoled  into  granting  the  State  favors  of  credit  which 
would  have  cost  them  dear. 

When  order  was  reestabUshed  and  the  State  had  ceased 
issuing  worthless  paper  money,  commercial  banks  under- 
took to  found  on  discount  the  issue  of  bank  notes.  The 
first  was  the  Caisse  des  Comptes  Courants,  established 
June  29,  1796,  with  headquarters  in  Paris  at  the  Place 
des  Victoires.  The  capital  stock  was  moderate,  amount- 
ing to  5,000,000  francs,  divided  into  1,000  shares  of  5,000 
francs  each.    This  institution  was  the  work  of  a  great 


II 


National    Monetary    Commission 


number  of  Paris  bankers,"  who  joined  together  in  this 
way  to  make  their  collections,  etc.  The  Caisse  kept 
the  funds  of  these  individual  banks,  and,  moreover,  re- 
discounted  their  commercial  paper.  This  bank  was  called 
"caisse,"  for,  as  we  have  said,  the  word  bank,  recaUing 
that  of  Law,  still  terrified  the  public.  This  Caisse  des 
Comptes  Courants  was  therefore  a  bankers'  bank.  We 
shall  see  presently  that  the  first  regulations  of  the  Bank 
of  France  were  copied  from  it,  and,  in  short,  that  the 
Caisse  des  Comptes  Courants  was  transformed  later  into 
the  Bank  of  France.  It  discounted  commercial  paper  at 
a  maximum  time  Umit  of  ninety  days,  three  indorse- 
ments being  required. 

The  Caisse  caused  interest  or  discoimt  rates  to  fall 
from  9  per  cent  to  6  per  cent.     It  made  handsome  profits, 
which  fact  encouraged  the  setting  up  of  other  banks  of 
the  same  kind.     Its  circulation,  including  bank  notes  in 
the  coffers,  amounted  to  20,000,000  francs.    The  only 
notes  issued  were  of   denominations  of    1,000  and  500 
francs.     It  encountered  no  difficulties,  except  perhaps 
the  following  circumstance,  which  was,  however,  quite 
accidental:  About  seventeen  months  after  its  foimding, 
in  November,  1797,  the  bank  was  robbed  of  some  2,500,000 
francs,  which  was  rather  a  large  sum  for  the  Caisse  des 
Comptes  Covuants.    The  news  spread  rapidly.     Bearers 
of  bank  notes  became  alarmed  and  appeared  in  crowds  at 
the  doors.    But  the  bankers  who  had  founded  the  Caisse 
des  Comptes  Coiurants  immediately  united  and  declared 
themselves  personally  responsible  for  the  liabilities  of  the 
Caisse.    Although  at  that  period  the  form  known  as  a 

o  Several  of  them  had   gained  experience  in  administering  the  affairs 
of  the  Caisse  d'Escompte. 

13 


Evolution     of    Credit     and     Banks 

limited  liability  partnership  {commandite)  had  not  been 
estabHshed  by  law,  it  was  already  in  existence.  The 
stockholders  of  the  Caisse  showed  on  this  occasion  that 
they  knew  how  to  make  a  decision  and  assume  responsi- 
bilities. The  Caisse  did  an  excellent  business ;  its  situation 
therefore  was  strong,  and  the  panic  proved  momentary. 

Another  establishment  was  organized  in  1797  shortly 
after  the  forming  of  the  Caisse  des  Comptes  Courants. 
This  time  the  scheme  was  not  promoted  by  bankers  but 
by  merchants,  who  wished  to  procure  in  this  way  faciHties 
for  their  own  business,  rather  than  to  seek  profits  directly 
from  banking  operations.     The  institution  was  called  the 
Caisse  d'Escompte    du    Commerce.     The    origin    of   the 
Caisse  des  Comptes   Courants  was  sufficiently  indicated 
by  its  name,  and  the  entirely  commercial  character  of 
the  Caisse  d'Escompte  du  Commerce  is  shown  in  the 
same  way.     This  will  explain  the  bitter  resistance  of 
the  latter  concern  to  being  merged  in  the  Bank  of  France, 
while  on  the  other  hand  the  Caisse  des  Comptes  Cou- 
rants joined  forces  with  it  willingly  and  at  once.     The 
Caisse  du  Commerce  (as  it  was  called  for  convenience) 
seems  indeed  to  have  yielded  only  to  force.     The  Bank 
of  France,  in  spite  of  all  Napoleon  could  do,  was  destined 
to  remain  in  reality  a  bankers'  bank.     Now,  the  interests 
of  the  Caisse  du  Commerce  were  entirely  different. 

The  nominal  capital  of  the  Caisse  du  Commerce 
amounted  to  24,000,000  francs,  represented  by  2,400  shares 
of  10,000  francs  each.  But  the  shareholders  had  not  paid 
in  more  than  a  quarter  of  this  sum— that  is  to  say,  6,000,000 
francs.  Its  board  of  directors  was  made  up  of  merchants 
of  all  kinds,  grocers,  haberdashers,  cloth  merchants,  silk 


13 


National    Monetary    Commission 

merchants,  etc.    The  undertaking  was  successful.     Its 
issue  never  exceeded  2o,ocx),cxx)  francs. 

It  may  be  well  to  mention  another  bank,  foimded  at 
this  time,  as  a  result  of  the  success  of  the  two  estab- 
lishments whose  origins  and  workings  we  have  just 
described  briefly.  It  was  called  the  Comptoir  Commer- 
cial, and  was  founded  in  1800.  It  was  usually  known  as 
the  Caisse  Jabach.  In  comparison  with  the  others  this 
bank  had  one  interesting  pecuHarity :  In  addition  to  notes 
of  the  denominations  of  1,000  and  500  francs,  it  issued 
notes  for  250  francs.  The  Caisse  Jabach  carried  on  a  dis- 
coimting  business,  the  only  one,  of  course,  which  justifies 
the  issue  of  bank  notes  redeemable  at  sight. 

Lastly  must  be  mentioned  the  founding  at  Rouen  in 
April,  1798,  of  a  bank  of  issue,  which  also  made  discounts. 
It  took  securities  with  two  names,  with  a  maximum  ma- 
ttirity  of  one  hundred  and  eighty  days.  It  is  seen  that 
in  the  matter  of  maturities  it  departed  from  the  custom 
of  the  Caisse  des  Comptes  Courants,  which  took  paper  of 
not  over  ninety  days,  or  just  half  as  long.  This  bank 
issued  notes  of  the  denominations  of  1,000,  500,  250  and 
100  francs.  No  note  as  small  as  100  francs  was  issued 
by  any  Paris  bank.  It  is  not  probable  that  this  house 
did  a  large  business,  or  that  it  had  deposits  of  any  great 
amount  with  which  to  make  discounts  (as  a  matter  of  fact 
it  allowed  interest  to  its  time  depositors) ,  for  the  issue  did 
not  go  beyond  the  very  moderate  sinn  of  200,000  francs. 

It  can  not  be  denied  that  after  the  terrible  years  of  the 
Revolution,  in  the  midst  of  the  confusion  and  anarchy  of 
the  Directory,  these  credit  estabUshments,  in  spite  of 
difl&cult  conditions,  survived,  maintained  their  credit,  and 

«4 


Evolution     of    Credit     and     Banks 

were  of  real  service  to  the  commerce  and  bankers  of  Paris. 
They  gave  not  the  sUghtest  occasion  for  complaint  or 
interference  on  the  part  of  the  public  authorities.  With- 
out any  sort  of  privilege,  having  no  connection  with  the 
Government,  they  were  able  to  meet  their  obligations  even 
in  the  midst  of  serious  panics. 

How  does  it  happen,  then,  that  this  most  satisfactory 
state  of  freedom  came  to  an  end  and  that  in  the  course 
of  a  few  years  there  was  organized  in  Paris  a  bank  with 
the  exclusive  privilege  of  issue?    Is  it  due  to  a  series  of 
natural  causes?    No.     Not  one  of  the  Caisses  just  de- 
scribed had  occasioned  disaster  or  invited  suppression. 
The  new  state  of  things  came  from  the  idea  of  credit 
which  existed  in  the  mind  of  General  Bonaparte,  as  well 
as  from  his  tendency  to  centraHze  everything,  and  because 
the  Government  at  that  moment  was  in  great  need  of 
money.     By  following  logically  the  development  of  the 
facts  we  shall  see  that  the  prime  motive  was  the  all- 
powerful  will  of  Napoleon. 

It  was  necessary  to  make  these  few  introductory  remarks 
in  order  to  show  the  conditions  which  existed  at  the  time 
of  the  founding  of  the  Bank  of  France— a  bank  which  was 
to  possess  later  the  sole  right  of  issue  for  the  whole  of 
France,  influencing  at  the  same  time  the  general  organiza- 
tion of  the  credit  system  of  that  country.  It  is  at  the 
present  moment  the  center  and  pivot  of  the  system.  And 
yet,  it  is  not  through  the  Bank  of  France,  through  its  own 
action,  but  independently  of  it— making  of  course  due 
allowance  for  the  r61e  that  circumstances  have  bestowed 
upon  it— that  this  evolution  of  credit  institutions  has 
taken  place. 


15 


Chapter  I. — The  founding  of  the  Bank  of  France. 

Reasons  for  founding  the  Bank  of  Prance.— Napoleon  wanted  a  bank  of  his  own.— 
Preparation  for  founding  the  Bank.— Capital  of  the  Bank  of  France.— Its  transac- 
Hons.-Its  organization.-Difflculties  in  the  way  of  raising  the  Bank's  capital  of 
30,000,000  francs.— The  intervention  of  the  sinking  fund.— The  Bank's  first  re- 
sources.- Delay  in  disposing  of  the  first  shares.— The  first  subscribers.— The 
assistance  of  the  National  Lottery.— First  charges  of  the  Bank.— Obligatory  rela- 
tions between  the  Bank  and  the  State.— The  bank  notes  of  the  Caisse  des  Comptes 
Courants.— The  first  operations  of  the  Bank.— Tendency  toward  a  single  bank  of 
issue.— The  First  Consul's  schemes  of  centralization.— First  conference  with  the 
Caisse  d'Escompte  du  Commerce.— Resistance  of  the  Caisse  d'Escompte  du  Com- 
merce—Manoeuvres against  the  Caisse  d'Escompte.— The  final  agreement  with 
the  Caisse  d'Escompte. 

At  the  time  when  the  foundations  of  the  Bank  of 
France  were  laid,  as  well  as  during  the  whole  period  of 
the  Empire,  the  press  and  writers  in  general  had  so 
Uttle  freedom  that  it  is  impossible  to  obtain,  either 
through  books  or  other  authentic  documents,  trustworthy 
details  or  exact  information  concerning  the  circumstances 
which  led  to  the  creation  of  the  Bank. 

Baron  Pelet  (de  la  Loz^re) ,  who  was  admitted  when  a 
very  young  man  to  Napoleon's  Council  of  State,  pubHshed 
in  i833«  the  notes  he  had  collected  while  he  was  a  mem- 
ber of  that  great  body.  He  tells  us  on  the  subject  of  the 
founding  of  the  Bank  of  France  (p.  248):  "The  rate  of 
interest  on  money  was  then  3  per  cent  a  month.  It  was 
determined  to  lower  this  rate,  and  especially  to  have  an 
establishment  which  would  take  the  government's  paper 
and  help  its  operations."  This  means  that  the  credit 
concerns  were  not  willing  to  take  government  paper  or 
the  drafts  of  the  government  contractors,  because  they 

<^  opinions  de  NapoUon  sur  divers  sujets  de  Politique  et  d' administration 
recueillies  par  un  membre  de  son  Conseil  d'Etat.     Paris,  1833. 

16 


Evolution     of    Credit    and     Banks 

lacked  confidence   in   the   Government.     Further  proof 
of  this  fact  is  given  by  the  same  author  (p.  249,  same 
volume).     Here  he  sets  forth  the  difficulties  which  arose 
in  1804  between  Napoleon  and  the  Bank  of  France.     "  He 
(the  Emperor)   in  the  year  1804  bitterly  reproached  a 
deputation  from  the  Bank  because  there  was,  right  in  its 
midst,  an  opposition  party  which  kept  the  obUgations  of 
the  collectors-general  from  being  discounted  and  also  re- 
fused to  give  commerce  the  necessary  accommodations. 
The  truth  of  the  matter  is  that  the  Bank  already  held 
government  obligations  to  the  amount  of  25,000,000  or 
30,000,000  francs,  and  that  the  aUeged  commercial  eflfects 
which  it  had  refused  were  those  of  Hervas,  Michel,  and 
other  contractors,  whose  paper  was  nothing  more  nor  less 
than  government  paper.    The  Bank  had  in  circulation 
bills  for  75,000,000  francs,  and  must  of  necessity  be  pre- 
pared to  honor  them  on  demand.     Napoleon  wanted  the 
Bank  to  increase  the  issue  to  100,000,000  or  150,000,000, 
at  the  risk  of  not  being  able  to  satisfy  the  bearers." 

All  the  facts  so  far  as  known  tend  to  prove  that 
First  Consul  Bonaparte  took  the  initial  steps  toward 
founding  the  Bank  of  France.  He  could  not  get  what 
he  wanted  from  the  free  banks.  On  the  other  hand,  he 
felt  that  the  Treasury  needed  money,  and  wanted  to 
have  under  his  hand  an  establishment  which  he  could 
compel  to  meet  his  wishes.  It  appears  indeed  from  this 
extract  from  the  notes  of  Baron  Pelet  that  nearly  three 
years  after  the  founding  of  the  Bank,  Napoleon, 
then  Emperor  and  undisputed  master  of  France,  did 
not  hesitate  to  speak  sharply  to  the  directors   of  the 


I97I — 10- 


17 


National    Monetary    Commission 

Bank,  who  were  little  inclined  to  discount  the  paper  of 
the  government  contractors. 

It  is  very  likely  that  he  broached  the  subject  more  in 
particular  to  certain  bankers  who  were  near  him,  espe- 
cially Perr^gaux,  who  had  come  from  Neufchatel  several 
years  before  the  Revolution  and  founded  at  Paris  a  very 
prosperous  banking  house.  The  directors  of  the  Caisse 
des  Comptes  Courants,  among  whom  was  Perregaux,  were 
probably  notified,  for  they  came  together  and  drew  up 
the  plan  of  a  new  establishment  which  was  to  take  over 
the  Caisse  des  Comptes  Courants. 

It  would  certainly  seem  that  here  originated  the  idea  of 
creating  a  new  bank  of  issue.  However,  public  opinion, 
as  represented  by  merchants  and  citizens  of  all  classes, 
was  brought  into  play.  A  certain  number  of  these  men 
met  and  prepared  a  petition  addressed  to  the  Directory, 
in  which  the  signers  requested  the  formation  of  a  new 
credit  institution.  This  occurred  toward  the  end  of  1 799 
and  the  first  days  of  January,  1800. 

Previous  to  this  manifestation  the  first  plan  of  the 
general  statutes  of  the  projected  bank  had  been  submitted 
to  the  Minister  of  Finance.  On  January  6,  1800,  the  re- 
gents, but  recently  elected,  MM.  Lecoulteux-Canteleu, 
Mallet,  Perregaux,  Nautort,  Perrier,  and  Perr^,  went  to 
the  Minister  of  Finance  and  laid  before  him  "the  princi- 
pal features  of  the  protection "  which  they  asked  of  the 
Government. 

The  plan  was  to  create  a  bank  of  discount,  circulation, 
and  issue  with  a  capital  of  30,000,000  francs.  The  figure 
was  large  for  the  time.     How  was  this  capital  to  be 


If 


Evolution     of    Credit    and    Banks 

raised?  This  difficulty  had  been  foreseen.  To  solve 
it  they  had  prepared  to  merge  the  Caisse  des 
Comptes  Courants  and  the  new  bank,  which  was  to  be 
called  the  Bank  of  France.  On  January  18,  1800,  the 
general  assembly  of  the  stockholders  of  the  Caisse  des 
Comptes  Courants  voted  to  dissolve  this  company  and 
enter  the  new  combination. 

The  capital  stock  was  fixed  at  30,000,000  francs 
and  divided  into  30,000  personal  shares  of  1,000 
francs  each.  The  Bank  of  France,  according  to  its 
first  statutes,  was  to  engage  in  the  following  transac- 
tions: Discounts,  collections,  running  accounts,  the  issue 
of  notes  payable  to  bearer  on  demand,  and  commerce  in 
gold  and  silver  bulHon.  It  was  also  to  open  a  sort  of 
savings  department  called  the  savings  and  investment 
•  bureau,  allowing  interest  to  depositors.  But  for  some 
reason  this  department  was  Httle  patronized,  and  was 
aboHshed  in  1808.  At  first  it  paid  5  per  cent  on  deposits; 
later  4  per  cent. 

A  regents'  council  of  15  members  was  to  administer  the 
affairs  of  the  Bank  of  France;  its  direct  management  was 
entrusted  to  a  committee  of  three  regents,  and  its  super- 
vision was  committed  to  a  council  of  three  censors.  A 
general  assembly  consistmg  of  the  200  largest  stock- 
holders represented  the  whole  body  of  stockholders.  Five 
shares  were  enough  to  give  the  holder  a  vote,  and  he  had 
as  many  votes  as  he  had  multiples  of  five  shares,  not 
exceeding  a  maximum  of  four. 

The  very  day  on  which  the  Caisse  des  Comptes  Courants 
was  dissolved,  a  decree  of  the  consuls  authorized  the 


19 


National    Monetary    Commission 

Minister  of  Finance  to  lease  for  the  Bank  the  state  building 
known  as  the  "Oratory,"  and  "the  former  church  which 
makes  a  part  of  it."  And  there  the  Bank  was  installed, 
in  property  belonging  to  the  State,  which  showed  already 
what  close  relations  existed  between  the  new  estabUsh- 
ment  and  the  Government. 

All  this  was  effected  without  obstacles.  Not  so  the 
getting  together  of  the  capital  of  the  Bank.  The  great 
difficulties  which  were  encountered  here  are  officially 
stated  in  the  report  laid  before  the  stockholders  of  the 
Bank  on  October  17,  1800.     Here  is  the  passage: 

"The  regents  who  were  in  charge  of  the  Bank  being 
convinced,  owing  to  the  scattered  state  of  capital,  that  it 
would  be  useless  to  expect  that  the  30,000,000  francs 
which  were  to  serve  as  banking  capital  would  be  sub- 
scribed promptly,  simply  by  calling  together  stockholders,  • 
their  first  care  was  to  call  to  the  attention  of  the  Gov- 
ernment the  protection  and  cooperation  necessary  to 
insure  the  success  of  the  proposed  estabUshment. 

"The  very  day  of  their  election,  the  directors  addressed 
a  petition  to  the  Minister  of  Finance  requesting  him  to  ob- 
tain from  the  consuls  the  permission  to  deposit  in  the 
Bank  of  France  the  funds  accruing  from  the  bonds  fiu:- 
nished  by  the  collectors-general  of  the  departments,  and 
destined  by  the  law  of  the  sixth  Frimaire  preceding  to  the 
paying  off  of  the  pubUc  debt,  and  also  to  guarantee  the 
payments  of  these  ame  collectors-general.  An  order  of 
July  18,  1800,  granted  the  request,  and  5,000,000  francs 
were  deposited  in  the  Bank  in  return  for  5,000  shares  reg- 
istered to  the  credit  of  the  sinking  fund. 


Evolution     of    Credit     and     Bank 


"The  Bank  having  got  its  first  start  through  this  fund 
could  now  commence  operations  in  competition  with  the 
Caisse  des  Comptes  Courants,  which  was  then  doing  busi- 
ness; but  for  fear  of  disturbing  the  money  market  by  this 
division  of  resources,  the  regents  determined  to  make 
every  effort  to  unite  the  two  establishments  whose  com- 
petition might  prove  dangerous." 

Even  in  this  official  report,  which  was   intended    to 
disguise   some  of   the  difficulties  encountered  in   raising 
the  capital  stock  of  the  Bank,  it  is  perfectly  clear  through 
the  very  testimony  of  the  founders  that  this  establishment 
got  its  first  start  by  official  order,  from  the  sinking  fund 
of  the  state  debt.     That  amount,  however,  made  only  one- 
sixth  of  the  capital.     Subscribers  for  shares  had  not  ap- 
peared in  great  numbers.     During  the  first  year  (1800). 
only  7,447  shares  «  were  taken,  and  this  only  after  uniting 
with  the  Caisse  des  Comptes  Courants.     Among  the  earli- 
est  subscribers   are   found   the   following:  First   Consul 
Bonaparte,    his    brother   Joseph    Bonaparte,    J.    Murat, 
Hortense  Beauhamais,  then  aides-de-camp  such  as  Duroc 
and  Lemarois,  and  finally.  Senator  Siey^s  and  several 
other  members  of  Napoleon's  immediate  circle,  including 
Barb^-Marbois,  Cr^et,  Cambac^r^s,  etc. 

In  the  early  part  of  March,  1800,  a  new  decree  of  the 
consuls  directed  that  the  reserve  fund  of  the  national  lot- 


o  Only  7,590  shares  received  the  dividend  at  the  end  of  the  second  half 
year  of  1800;  12,348  shares  received  the  dividend  of  the  first  half  of  1801; 
14,705  that  of  the  second  half  of  the  same  year.  It  was  only  for  the  fiscal 
year  1802  that  the  number  30,000  was  reached,  and  even  then  because  a 
subscnption  took  place  in  October  and  November,  1801.  It  was  on  this 
occasion  that  the  shares  of  the  Bank  commenced  to  be  quoted  on  the 
Paris  Bourse  (October  27,  1801). 


30 


21 


National    Monetary    Commission 

tery  should  be  deposited  at  the  Bank.  Little  by  little 
they  succeeded  in  this  way  in  disposing  of  15,000  out  of 
the  30,000  shares — that  is,  half  of  the  capital  stock  stipu- 
lated in  the  statutes. 

The  Government  had  been  in  reality  the  first  subscriber, 
through  the  agency  of  the  sinking  fund,  but  it  had  made 
the  condition  that  in  return  for  this  first  cooperation  the 
unpaid  obligations  of  the  collectors-general  should  be  met 
in  full  by  the  Bank  of  France  to  the  amount  not  only 
of  the  sums  standing  to  the  credit  of  the  sinking  fund 
(which  had  deposited  at  the^Bank  funds  proceeding  from 
the  bonds  furnished  by  the  collectors-general)  but  also 
an  amount  equivalent  to  the  total  of  the  shares  bought 
by  the  Government,  which,  as  we  know,  amounted  to 
5,000,000  francs. 

So  the  State  gave  with  one  hand  and  took  away  with 
the  other.  Having  been  placed  at  the  very  beginning 
imder  the  protection  of  the  Government,  the  Bank  was 
forced  Httle  by  little  to  tighten  the  bonds  from  which 
it  could  no  longer  escape.  Although  Perregaux,  president 
of  the  Bank,  declared  in  his  report  of  October  17,  1800, 
that  the  Bank  "negotiates  with  the  Government  only 
when  it  finds  it  advantageous  to  do  so  and  receives  all 
its  usual  securities,"  the  new  institution  of  issue  was  not 
as  free  as  Perregaux  declared,  as  was  proved  by  the 
sequel.  At  any  rate,  the  State  had  sold  without  scruple 
the  greater  part  of  its  shares.  In  1 801-2  (in  the  year  X), 
■of  the  5,000  shares  that  the  sinking  ftmd  had  bought  in 
the  beginning,  all  but  500  had  been  sold. 

It  was  with  the  bank  notes  of  the  Caisse  des  Comptes 
Courants  that  the  Bank  of  France  began  operations.     At 

22 


Evolution     of    Credit     and     Bank 


the  time  it  was  incorporated  with  the  Bank  of  France 
this  establishment  brought  the  following  resources: 

„        .  Francs. 

Specie 

^  5,000,000 

Commercial  paper 6,000,000 

It  had  in  addition,  either  in  circulation  or  in  its  coffers, 
20,780,327  francs  in  bank  notes.  It  brought  also  a  very 
substantial  credit,  and  the  technical  experience  of  its 
administrators.  So  the  notes  of  the  Caisse  des  Comptes 
Courants  became  the  first  fiduciary  money  of  the  Bank. 

It  was  in  1808  that  the  notes  of  the  Caisse  des  Comptes 
Courants  disappeared  entirely  from  circulation.  They 
were  probably  withdrawn  in  1807. 

In  the  first  year's  activity  (1801,  year  IX)  the  Bank 
discounted  commercial  paper  to  the  amount  of  about 
89,000,000  francs.  The  following  year  its  discounts 
doubled,  reaching  in  round  numbers  180,000,000  francs, 
while  its  circulation  during  the  second  year  amounted  to 
30,000,000  francs. 

Besides  the  Bank  of  France,  several  other  banks  of 
issue  which  we  have  mentioned  above  were  still  in  oper- 
ation. The  most  important  among  them  was  the  Caisse 
d'Escompte  du  Commerce.  The  idea  of  the  First  Consul 
from  the  start  was  to  make  of  the  new  concern  an  institu- 
tion which  he  could  have  under  his  control.  This  appears 
in  the  very  beginning,  when  a  deputation  from  the  bank 
council,  accompanied  by  M.  Cr^tet,  Councillor  of  State, 
who  had  an  important  share  in  these  events,  asked  him 
for  government  protection.  Not  being  famihar  with 
financial  questions,  and  especially  with  questions  of  bank- 
ing and  credit,  he  simply  appUed  to  this  matter  his  ideas 
of  centralization.     It  may  be  surmised  from  the  opinions 

23  -*-. 


National    Monetary    Commission 


Evolution     of    Credit     and     Banks 


he  expressed  afterwards  in  public  that  he  was  already 
turning  over  in  his  mind  the  plan  for  a  single  bank  of  issue, 
with  a  view  of  using  it  to  further  his  projects  and  ambition. 

To  attain  this  end  the  first  method  tried  was  diplomacy. 
Negotiations  were  opened  in  April,  1802,  to  induce  the 
Caisse  d'Escompte  du  Commerce  to  carry  out  of  its  own 
accord  its  fusion  with  the  Bank.  They  were  from  the 
start  exceedingly  difficult.  The  Caisse  d'Escompte  re- 
fused to  be  merged  in  the  Bank.  When  the  directors 
were  assured  that  in  the  matter  of  the  issue  of  bank  notes 
the  unity  of  the  issuing  establishment  was  a  necessity  and 
an  advantage  to  the  public,  they  answered,  on  May  14, 
1802,  "that  the  Caisse  d'Escompte  with  6,000,000  francs 
of  capital  issued  bank  notes  to  the  value  of  20,000,000 
francs,  while  the  Bank  with  a  capital  of  30,000,000  francs 
had  a  circulation  of  only  30,000,000  francs."  The  argu- 
ment was  good,  for  the  aim  of  issuing  bank  notes  is  to  keep 
in  circulation,  in  the  form  of  bank  notes  payable  to  the 
bearer  on  demand,  paper  money  with  a  real  value,  easy  to 
handle  and  representing  commercial  paper  which  is  held 
until  maturity  in  the  safe  of  the  bank  which  makes  the  issue. 
The  capital  is  there  only  to  make  good  the  non-payment  of 
commercial  paper  on  maturity.  Now,  discount  intelli- 
gently handled  ought  to  suffer  only  small  losses ;  a  reserve 
of  specie  in  the  coffers  should  suffice  to  cover  these  losses 
and  redeem  the  bank  notes  which  have  been  issued  on 
the  basis  of  unpaid  effects.  Credit  by  issue  does  not 
mean  circulation  in  the  form  of  paper  money  of  specie, 
but  of  short-dated  commercial  bills. 

The  Caisse  d'Escompte  was  slow  in  being  persuaded, 
and  held  out  for  a  long  time.  What  happened  finally  has 
never  been  cleared  up.     The  press,  as  we  have  said,  was 


not  free,  and  there  is  no  trace  of  the  methods  (probably 
despotic)  which  were  resorted  to  at  the  moment  to  con- 
vert the  administrators  of  the  Caisse  d'Escompte.     An 
EngHsh  newspaper,  the  London  Courier,  which  published 
letters  from  France,  received  one  dated  October  9,  1802, 
in  which  it  was  said  that  the  State  had  applied  several 
times  to  the  Caisse  d'Escompte  to  discount  its  obligations 
and  had  been  refused.     Then,  as  it  was  alleged,  a  well- 
known  expedient  had  been  resorted  to— that  of  collecting 
a  great  quantity  of  bank  notes  of  the  Caisse  d'Escompte 
and   presenting  them  all  at  once  one  fine  morning  for 
redemption.     The  establishment  paid  them.     The  Caisse 
went  through  the  same  ordeal  a  second  time  and  held  out 
successfully  against  the  Government.     At  last,  still  ac- 
cording to  this  English  correspondence,  the  Government, 
being  weary  of  the  struggle,  sent  an  armed  force  to  close 
the  offices  of  the  Caisse  d'Escompte. 

But,  let  it  be  repeated,  there  is  in  existence  no  authen- 
tic document  proving  these  facts.  However,  even  if  they 
are  not  to  be  considered  as  certain,  it  is  possible  to  assert 
that  the  directors  of  the  Caisse  d'Escompte  du  Commerce 
consented  to  unite  with  the  Bank  only  because  they  saw 
that  further  resistance  would  be  useless.  The  final  agree- 
ment with  the  Bank  was  not  signed  until  August  25,  1803, 
more  than  four  months  after  the  Bank  of  France  had 
been  invested  with  the  exclusive  privilege  of  issuing  bank 
notes  in  Paris. 

Naturally,  the  Factorerie  and  the  Comptoir  Commercial 
and  the  Comptoir  Jabach  disappeared  likewise,  or  at  least 
were  incorporated  with  the  Bank. 


24 


25 


Evolution     of    Credit     and     Banks 


ill 


Chapter  II.— The  charter  or  privilege  of  the  Bank 

of  France. 

The  Bank  of  France  is  given  the  exclusive  right  to  issue  bank  notes  in  Paris.- 
The  law  of  April  14, 1803,  24  Germinal,  Year  XI.-Duration  of  the  pnvilege.-In- 
r^^Tf  capiLh-T^e  riiht  to  discounts  extended-Fixing  the  dividends  -Per- 
S^el  of  the  regents'  councU.-The  real  situation.-The  balance  was  not  ^. 
tatoed  between  the  circulation  and  the  convertible  resources.-The  criste  of  1805.- 
The  Emperor's  departure  for  Germany.  Rumors  that  were  <^«*^^t«d.-Reduc. 
ttT  of  amount  of  discounts.-Limiting  the  redemption  of  ;°t««:-N°/7^JP^, 
to  the  provincial  banks.-The  mistakes  that  had  been  made.-The  bad  effect  of 
reUtkms  between  the  State  and  the  Bank. 

From  the  facts  that  have  just  been  stated  it  will  not 
be  difficult  to  foresee  their  only  possible  outcome.  It  is 
obvious  that  the  Bank  of  France  was  destined  to  receive 
the  sole  right  of  issue.  And  what  is  more,  this  was  noth- 
ing but  a  stopping  place  on  the  way  to  the  final  goal, 
namely,  handing  over  the  establishment  to  the  head  of 

the  State. 

Although  the  event  was  planned  beforehand,  a  slight 
panic  which  made  itself  felt  in  the  course  of  1802  (the 
year  XI)  was  seized  upon  as  a  pretext  for  carrying  out  the 
idea  of  a  single  bank  of  issue.  The  pretext  was  a  suffi- 
ciently flimsy  one,  for  the  banks  of  issue,  including  the 
Caisse  d'Escompte  du  Commerce,  had  given  no  occasion 

for  complaint. 

It  was  the  law  of  April  14,  1803,  which  radically  changed 
the  statutes  of  the  Bank.  As  the  president  of  the  stock- 
holders said  in  his  report  of  the  year  XII  (1804),  it 
was  not  so  much  a  commercial  as  it  was  a  political  law. 
Its  underlying  provisions  were  as  follows:  The  Bank  of 
France  was  henceforth  to  have  the  exclusive  privilege  of 
issuing   bank  notes.     The   Caisse   d'Escompte  du  Com- 

26 


merce,  the  Factorerie,  and  other  companies  which  issued 
notes  in  Paris,  ceased  to  have  the  right  to  issue  new 
ones  from  the  date  of  pubUcation  of  the  law  of  Germi- 
nal. They  were  to  withdraw  all  notes  from  circulation 
within  the  very  short  period  of  six  months  or  there- 
abouts. No  bank  could  be  organized  in  the  provinces 
without  the  consent  of  the  Government.  The  Govern- 
ment reserved  the  right  to  grant  the  privilege  of  issue, 
and  to  fix  the  maximum  of  notes  issued,  declaring  at 
the  same  time  that  these  notes  could  not  be  manufac- 
tured elsewhere  than  at  Paris.  The  privilege  was  to 
last  fifteen  years,  from  the  first  Venddmiaire,  year  XII 
(September  24,  1803).  The  capital  of  the  Bank  was 
raised  to  45,000,000  francs  by  creating  15,000  new  shares. 
The  smallest  denomination  for  Bank  of  France  notes  was 
to  be  500  francs,  and  250  francs  for  any  departmental 
banks  that  might  be  founded.  In  the  statutes  of  the 
year  VIII,  the  shareholders  alone  had  special  rights  to 
discount;  in  future,  they  were  no  longer  to  enjoy  this 
privilege;  every  merchant,  manufacturer,  banker,  etc., 
on  satisfying  the  general  requirements,  could  be  admitted 
to  discount  his  paper  at  this  establishment.  The  annual 
dividend  was  fixed  at  6  per  cent,  not  including  the  income 
on  the  surplus  capital  invested  in  government  stock,  which 
could  be  distributed  in  addition  to  the  6  per  cent.  Seven 
regents  out  of  fifteen  and  the  three  censors  were  to  be 
chosen  from  the  manufacturers,  mill  owners,  or  trades- 
men who  were  shareholders  in  the  Bank.  Every  member 
of  the  company  could  have  but  one  vote,  whatever  the 
number  of  shares  he  held. 


27 


National    Monetary    Commission 

Let  us  note  at  this  point  that  the  capital  stock  was 
raised  from  30,000,000  to  45,000,000  francs  without  the 
slightest  commercial  necessity. 

To  all  appearances,  from  the  year  VIII  to  the  year  XII, 
the  Bank  had  increased  in  rather  large  proportions  its 
** portfolio"  of  commercial  paper — in  other  words,  its  dis- 
coimts.  Here  are  the  comparative  figures  (maximum  and 
minimum)  relative  to  the  reserve,  the  commercial  dis- 
coimts,  and  the  circulation  of  bank  notes  for  the  )rears 
VIII  and  XII: 

[Million  francs.] 


Reserve. 

Commercial  dis- 
counts. 

Cirailatiou. 

Maxi- 
mum. 

Mini- 
mum. 

Maxi- 
mum. 

Mini- 
mum. 

Maxi- 
mum. 

Mini- 
mum. 

Year  VIII,  second  half  year 
(1800)          

II 

2S 

6 
5 

31 

76 

5 

S3 

23 
70 

9 

Year XII  (1803-4)--- 

54 

Average  rate  of  interest,  6  per  cent. 


But,  according  to  the  opinion  of  MoUien,  who  was  not 
unfriendly  to  the  Bank  of  France,  there  was  in  what  was 
called  the  commercial  "portfolio"  only  a  very  small  per 
cent  of  real  commercial  values.  These  large  figures  were 
mostly  made  up  of  government  paper  or  that  of  the 

contractors. 

In  reality,  they  were  not  liquid  values,  capable  of  being 
reaUzed  in  specie  quickly  or  on  short  notice,  making  it 
possible  to  redeem  bank  notes  without  nmning  the  risk 
of  bankruptcy  in  case  of  a  panic.  M.  Gautier,  who  was 
afterwards  deputy  governor  of  the  Bank,  states  positively 
in  his  study  on  the  institutions  of  issue  in  France  and 

a8 


Evolution     of    Credit     and     Banks 

America,  that  out  of  97,000,000  francs  of  paper  discoimted 
there  was  as  much  as  80,000,000  which  represented  obU- 
gations  of  the  collectors -general  taken  at  6  per  cent,  and 
which  the  Bank  would  not  have  been  able  to  rediscount, 
even  at  12  per  cent.  On  the  other  hand,  from  the  year 
VIII  to  the  year  XIII,  the  Bank  had  advanced  to  the 
public  Treasury  722,000,000  francs;  the  total  of  all 
discounts  during  this  period  of  six  years  was  scarcely 
three  times  this  amount.  Now,  in  the  year  XIII,  the 
circulation  of  bank  notes  had  reached  nearly  80,000,000 
francs.  The  maximum  reserve  had  not  gone  beyond 
24,000,000  francs,  and  the  ''portfolio"  contained  not 
more  than  17  per  cent^  of  real  commercial  paper,  that 
is,  of  negotiable  paper  or  paper  convertible  into 
specie.  Notice  that  we  have  spoken  of  the  maximum 
reserve;  the  minimum  fell  the  same  years  (1804-5)  below 
2,000,000  francs.  At  the  slightest  economic  disaster,  the 
Bank,  placed  in  this  abnormal  situation,  must  necessarily 
get  into  difficulties. 

We  will  not  describe  in  detail  the  transactions  with 
the  Merchants'  Association,  conducted  by  the  celebrated 
army  contractor,  Ouvrard.  This  company  had  deaUngs 
with  the  Treasury.  It  discounted  effects  at  the  Bank,  in 
return  for  which  the  latter  gave  bank  notes,  increasing  by 
that  much  the  circulation.  Now,  these  effects  were 
credit  paper,  and  the  Bank  had  taken  them  only  to  obHge 
the  Government,  then  represented  by  Baron  Marbois, 
Minister  of  the  Treastuy.  In  addition  to  this,  after  the 
Emperor  had  set  out  for  Germany,  the  rumor  was  circu- 
lated in  Paris  that  he  had  carried  away  the  metallic 


29 


% 


National    Monetary    Commission 

reserve  from  the  Bank  to  fill  his  army  coffers.    The 
statement  was  not  true.     To  be  sure  many  soldiers  had 
come  to  draw  money  from  their  accounts  at  the  Bank  in 
order  to  take  the  field.     As  a  result  of  the  working  of  all 
of  these  causes,  a  real  panic  arose.     Bank  notes  were 
presented  in  great  numbers  at  the  doors  of  the  Bank  of 
France.     The  directors  of  this  establishment  made  the 
mistake  of  restricting  their  discounts— a  disastrous  pro- 
ceeding at  such  a  moment.     The  bank  notes  depreciated 
lo  and  15  per  cent.     The  Bank  was  reduced  to  a  partial 
suspension  of  payments;  it  limited  the  redemption  of 
notes  to  600,000  francs  a  day.     The  Bank  acted  more 
wisely  in  sending  to  the  provincial  bankers  paper  on  their 
own  localities,  asking  them  to  send  back  the  value  of 
this  paper  in  specie. 

What  mistake  had  been  made?     Issuing  more  bank 
notes   than   the  needs   of   commerce  justified.     And   m 
exchange  for  what  securities  had  the  Bank  made  this  issue? 
In  exchange  for  the  credit  paper  of  the  government  con- 
tractors; in   exchange   for   the  obligations  of  collectors- 
general  which  could  not  be  paid,  because  the  directors  of 
the  Merchants'  Association  had  aheady  received  the  money 
that  these  obhgations  represented.     At  the  critical  moment 
the  specie  in  the  coffers  fell  to  782,000  francs  on  September 
24,  1805,  in  the  face  of  a  circulation  of  63,000,000  francs. 
Order  was  reestablished  by  the  end  of  a  month.     The 
victory  of  Austerlitz  helped,  and  also  the  more  or  less 
regular  measures  that  had  been  adopted  pell-mell,  good 
and   bad   together.     It  was   certainly,  too,  the  opinion 
people  had  of  the  relations  of  the  Bank  with  the  State 


Evolution     of    Credit     and     Banks 

that  had  aggravated  this  crisis.  It  is  moreover  a  typical 
example  of  the  mistakes  that  may  be  committed  by  a 
bank  of  issue,  both  in  becoming  involved  in  a  difficult 
situation  and  in  trying  to  escape  from  it  by  expedients 
which  are  for  the  most  part  more  harmful  than  efficacious. 
Napoleon,  on  returning  from  Germany,  was  much 
alarmed  at  this  crisis,  the  real  causes  of  which  he  did  not 
clearly  grasp.  He  wanted  to  have  the  Bank  "more  in 
his  hands,"  and,  with  this  in  view,  prepared  a  new  consti- 
tution for  the  establishment.  It  was  the  decree  of  Jan- 
uary 16,  1808,  which  sanctioned  these  modifications. 


30 


31 


Evolution     of    Credit     and     Banks 


Chapter  III.— The   fundamental  statutes  of   the  Bank— 
It  comes  into  closer  relation  with  the  State,  1806-1814. 

The  law  of  April  22,  1806.-Decree  of  January  16,  1808,  ratifying  the  law  of  April 
22  1808  -The  Bank  creates  branch  offices  in  the  provinces.-Limited  transactions 
of 'these  Comptoirs.-Their  disappearance.-The  Bank  of  France  from  1808  to  the 
faU  of  the  Empire.-lndustry  hi  France  at  the  end  of  the  eighteenth  century  and  the 
beginning  of  the  ntoeteenth-National  expositions  at  Paris  under  the  Emplre.- 
The  efforts  of  learned  men.-Political  obstacles.-Napoleon's  anxiety  for  his  Bank. 
His  study  of  the  question.-Napoleon  asks  MoUien  to  explahi  the  nature  of  a  bank 
of  i8sue.-The  Havre  note.-Masterly  statement  of  the  true  mechanism  of  a  bank 
of  issue.-Eitract8  from  the  Havre  note.  May  29,  I810.-The  opinion  of  MoUien  on 
the  nature  of  the  operations  of  a  bank  of  issue.-The  last  years  of  the  Empire.- 
Danger  of  holding  state  paper  in  panic  times.-Cri8is  of  1814.  Panic  of  holders  of 
notes. 

According  to  the  law  of  April  22,  1806,  the  committee 
of  three  which  had  been  chosen  from  the  regents  named 
by  the  stockholders  to  govern  the  Bank,  was  replaced  by 
a  governor  and  two  deputy  governors,  named  by  the  head 
of  the  State.    The  first  governor  was  M.  Crdtet,  Councillor 
of  State.     He  assumed  his  duties  April  25,  1806.     This 
governor  was  nothing  more  than  a  functionary,  subject 
to  the  dictates  of  the  State.    The  privilege  was  prolonged 
twenty-five  years  beyond  the  fifteen  years  granted  by 
the  law  of  the  year  XI.    The  capital  was  doubled  by  the 
issue  of  45,000  new  shares  and  raised,  consequently,  to 
90,000,000  francs.     The  regents'  council,  still  composed 
of  15  members,  was  to  include  5  manufacturers,  merchants, 
or  mill  owners,  and  3  collectors-general.     This  introduc- 
tion of  manufacturers,  tradesmen,  and  collectors-general 
mto  the  board  of  directors  came  from  Napoleon's  notion 
that  the  crisis  was  caused  by  the  bankers  themselves. 
He  was  not  overfond  of  them,  especially  smce  the  Consu- 


late, when  they  had  refused  him  money,  and  he  distrusted 
them  because  he  saw  that  they  made  use  of  the  Bank  to 
advance  their  own  interests. 

In  placing  Cr^tet  at  the  head  of  this  establishment, 
Napoleon,  knowing  the  tendencies  of  the  governor  and 
his  administrative  skill,  transformed  the  Bank  of  France 
in  reality  into  a  state  bank  whose  capital  was  furnished 
by  private  individuals. 

The  annual  dividend  was  composed,  first,  of  a  distribu- 
tion not  to  exceed  6  per  cent  of  the  original  capital;  sec- 
ond, of  a  second  distribution  equal  to  two-thirds  of  the 
remaining  profits.     The  other  third  was  kept  in  reserve. 

The  imperial  decree  of  January  16,  igo8,  ratified  the  law 
of  April  22,  1806.  It  was  there  specified  that  the  Bank 
should  create  in  the  principal  provincial  towns  branch 
offices,  chiefly  in  places  where  they  would  serve  the  needs 
of  commerce.  Several  months  later,  a  decree  of  May  18, 
1808,  regulated  the  organization  of  these  branches.  The 
rate  of  discount  was  fixed  at  5  per  cent.  Once  a  year  the 
Minister  of  Finance  was  to  make  a  report  on  the  transac- 
tions of  each  branch  office,  and  propose,  if  it  were  judged 
necessary,  a  lowering  of  this  rate.  In  obedience  to  this 
order,  branches  were  created  on  June  24,  1808,  at  Lyons 
and  Rouen.  The  Bank  had  the  exclusive  right  of  issue  only 
in  the  towns  where  it  had  branch  offices.  The  State  could 
therefore  give  this  privilege  to  other  establishments  in  other 
places.  A  third  branch  was  founded  at  Lille  May  29, 1810. 
This  latter  was  not  successful,  and  closed  its  doors  in  18 13. 
It  had  been  very  little  patronized,  and  its  aiffairs  were  not 
difficult  to  liquidate.    The  branch  at  Rouen  had  a  rather 


32 


1971— It 


33 


National    Monetary    Commission 

brisk  business  for  several  years.     People  in  Rouen  were 
already  used  to  banks  of  issue  and  to  bank  notes.     We 
have  seen  above  that  in  that  town  there  existed  a  very 
prosperous  institution  of  issue  when  the  founding  of  the 
Bank  of  France  and  the  suppression  of  the  right  of  free 
issue  of  bank  notes  were  decreed  by  the  Directory.    The 
Lyons  and  Rouen  branches  each  lasted  nine  years,  and 
were  closed  in  1817.     The  latter  had  discounted  m  this 
time  commercial  bills  to  the  amount  of  160,000,000  francs, 
or  an  average  of  17,500,000  francs  a  year.    The  profits 
had  not  been  large.    The  Lyons  branch  had  been  a  little 
more  active,  as  the  location  was  more  favorable  to  busi- 
ness than  Rouen..  The  first  few  years  were  fairly  good. 
It  was  not  until  1810  that  the  Bank  sent  to  its  branch 
offices  notes  of  the  denomination  of  250  francs.     On  this 
occasion  the  rate  of  discount,  which  had  been  5  per  cent, 
was  lowered  to  4  per  cent.     But  the  foreign  invasions  and 
the  slackness  of  business  which  marked  the  downfall  of  the 
Empire  brought  about  the  closing  of  the  branches.     In 
reality,  the  Bank  had  not  become  much  involved  in  this 
scheme.     If  these  establishments  made  some  profits  m  the 
first  years,  they  saw  them  disappear  and  even  change  to 
losses  in  181 7,  when  they  ran  short  100,000  francs. 

The  law  of  1806  and  the  decrees  of  1808,  which  con- 
firmed and  at  the  same  time  aggravated  it,  had,  as  we 
have  seen,  brought  the  Government  and  the  Bank  closer 
together.  At  that  period  the  Bank  was  chiefly  a  state 
concern.  For  four  years,  until  1812,  no  difficulties  were 
encountered.  To  be  sure,  business  was  dull,  the  poHtical 
situation  was  uncertam;  continual  wars  interfered  with 


Evolution     of    Credit     and     Banks 

the  setting  up  of  industrial  and  commercial  enterprises. 
Capital  was  abundant  and  idle.     The  year  18 10  was  the 
only  one  which  can  be  reckoned  in  any  degree  active;  the 
Bank  made  discounts  amounting  to  a  total  of  715,000,000 
francs,  and  that  thanks  to  the  lowering  of  the  interest  rate 
to  4  per  cent.     But  at  the  beginning  of  the  year  181 2  it 
had  in  the  coffers  1 14,000,000  francs  in  specie,  and  in  cir- 
culation 117,000,000  francs  in  bank  notes;  commercial  dis- 
coimts  amounted  to  only  15,000,000  francs;  in  the  course 
of  the  year  they  even  fell  as  low  as  10,000,000  francs.     It 
was   the   Treasury   which   furnished   bills   for   discount. 
Thus  in  181 1  the  Bank  discounted  state  obligations  to  the 
value  of  about  15,000,000  francs.     These  obligations  went 
under  the  name  of  excise  duties  {droits  reunis),  and  had 
to  do  with  the  tax  or  octroi  on  goods  brought  into  the  city. 
In  181 2  the  same  kind  of  obligations  were  discoimted 
again  for  the  stmi  of  2,000,000  francs.     In  addition,  an 
advance  of  40,000,000  francs  had  been  made  to  the  State 
in  the  preceding  years  on  the  obligations  of  the  collectors- 
general.     At  this  moment,  therefore,  the  principal  client 
of  the  Bank  was  the  Treasury,  and  the  Bank  was  neglecting 
for  the  Treasury  the  interests  of  its  clients  in  industry 
and  commerce. 

However,  it  was  not  the  elements  of  economic  progress 
that  were  lacking  in  France.  In  spite  of  the  Revolution, 
in  spite  of  the  anarchy  of  the  Directory  and  the  grave 
financial  disturbances  resulting  from  it,  a  renewal  of  in- 
dustry, a  veritable  revival  of  the  arts,  business,  and  inven- 
tions had  taken  place.  This  is  proved  by  the  number  of 
expositions  held  at  that  time. 


34 


35 


■11(1 


I  > 


National    Monetary    Commission 

The  first  exposition  which  was  opened  in  Europe  was 
organized  by  France.     It  was  held  in  the  Champ  de  Mars, 
and  lasted  a  week,  but  was  not  a  very  brilliant  affair 
There  were  no  exhibitors,  of  whom  lo  or  12  received 
prizes     The  expositions  of  1801  and  1802  were  more  suc- 
cessful.    Carcel  received  a  prize  for  his  lamps,  Jacquart 
for  his  machine  loom,  Temaux  for  woolen  stuffs,  Mont- 
golfier  of  the  town  of  Annonay,  for  his  paper,  Fauler  for 
his  morocco  leather.     At  the  exposition  of  1 802  were  seen 
cashmere  shawls,  imitating  those  of  India,  Sallandrouze 
carpets,  and  Sfevres  porcelain.     After  the  victory  of  Aus- 
terUtz  a  new  exposition  was  planned,  and  the  buildings 
erected  on  the  parade  ground  of  the  Invalides.     Twenty- 
seven  gold  medals  were  distributed,  146  silver  medals,  326 
honorable  mentions,  etc.     The  following  table  will  give 
an  idea  of  the  increasing  importance  of  these  expositions: 


\ 

Date. 

Exhib- 
itors. 

1798 
1801 

l803 

1806 

no 

First  exposition - 

330 

Second  exposition --- - 

540 

Third  exposition- 

i.4aa 

Fourth  exposition -- 

The  discoveries  in  chemistry  which  revolutionized  at 
that  time  certain  industries,  as,  for  example,  the  manu- 
facture of  artificial  soda,  the  improvements  in  the  paper 
industry,  and,  finally,  mechanical  inventions  for  spinnmg 
and  weaving-all  these  were  the  vanguard  of  the  one 
supreme  invention  most  marvelous  of  all,  namely,  the 
steam  engine.  Chaptal,  BerthoUet,  Conte,  Vauquelm, 
Th^iard,  Jacquart,  and  others  were  working  to  brmg  out 

36 


Evolution     of    Credit     and     Banks 

of  science  new  industries.  But  political  obstacles  arose, 
hindering  economic  progress.  Even  though  the  nearly 
continual  wars  supported  themselves,  and  though  they  in- 
volved the  manufacture  of  arms  and  munitions,  and  so 
furnished  employment  to  the  industries  connected  with 
the  equipment  and  maintenance  of  armies,  they  took  away 
many  hands  from  agriculture,  manufactures,  and  com- 
merce. Peace  is  the  first  necessity  of  business  prosperity. 
Business  enterprises  can  not  be  launched  without  a  fair 
certainty  that  no  unforeseen  event  will  bring  them  to 
grief.  This  explains  the  very  slight  commercial  activity 
of  the  Bank  during  these  years,  but  the  years  to  follow 
are  still  more  unfavorable  and  more  filled  with  trials  for 
this  institution. 

Napoleon  was  solicitous  for  all  that  concerned  the 
Bank — his  Bank  as  he  called  it  in  discussions  in  the  Coun- 
cil of  State.  He  lu-ged  his  ministers  to  study  the  subject. 
Among  them  was  Mollien,  Minister  of  the  Treasury ,«  a 
highly  educated  man,  very  learned  both  in  economic 
theory  and  practice.  Napoleon  was  attached  to  him  not 
because  of  any  liking  for  him,  but  because  he  was  useful. 
Mollien  dared  tell  the  truth  to  the  Emperor;  he  was  never 
a  courtier.  Napoleon  had  asked  him  his  opinion  on  the 
Bank  of  France.  The  Emperor  was  (May,  1810)  at  Havre, 
and  in  correspondence  with  Mollien  in  regard  to  foimd- 
ing  a  branch  office  of  the  Bank  at  UUe.  In  a  letter 
dated  May  20  he  said  to  his  Minister  of  the  Treasury, 
after  speaking  of  discount  at  Rouen:  "  Make  me  a  report 

o  There  were  at  that  time,  and  during  the  whole  period  of  the  Empire, 
two  Ministers  of  Finance:  The  first,  Gaudin,  Minister  of  Finance,  or 
Receipts;  the  second,  MoUien,  Minister  of  the  Treasury,  or  Expenditures. 

37 


National    Monetary  jComi^^ 

which  will  help  tne  to  understand  the  nature  of  the  deposit 
of  the   Bank  of   France.     Who  issues  the  bank  notes? 
Who  receives  the  profits?    Who  furnishes  the  funds?" 
MoUien  rephed  in  the  celebrated  memorandum  called  the 
Havre  note,  in  which  he  makes  clear  the  true  theory  of 
banks  of  issue.     This  was  called  the  Havre  note,  because 
the  Emperor  was  still  at  Havre,  and  wrote  to  Mollien  on 
receiving  it:  ''This  is  the  first  thing  I  have  ever  read  on 
the  subject  that  is  perfectly  clear,  well  thought  out,  and 
without  abstractions;  I  had  an  idea  of  having  it  printed, 
but  I  should  Uke  to  know  first  if  there  would  be  any 
objection.     Take  this  memorandum  to  the  Bank  as  coming 
from  me  and  give  them  a  chance  to  attack  it  in  your 

presence." 

.    We  will  give  the  most  important  points  of  this  document. 
The  question  is  adimrably  stated,  and  it  is  here  that  must 
be  sought  trustworthy  information  as  to  the  true  mechan- 
ism of  a  bank  of  issue.     It  is,  let  u§  note  in  passing,  suffi- 
ciently surprising  that  Napoleon  adopted  so  readily  such 
daring  ideas:  "The  purpose  of  this  capital  (the  30,000,000 
francs  decreed  by  the  law  of  the  year  VHI)  was  not  to 
give  the  bank  the  funds  necessary  to  exploit  its  privilege; 
this  capital  is  not  the  instrument  of  its  discounts,  and 
can  not  be  used  for  discounts.    The  privilege  of  the  Bank 
consists  in  the  right  to  create  and  manufacture  special 
money  for  its  discounts.     If  a  bank  used  its  capital  for 
discounts,  it  would  not  need  any  privilege.     *    *    *     It 
is  independently  of  its  capital  that  it  creates  by  its  notes 
its  true  and  only  discounting  medium.    *    *    *    The 
necessity  of  furnishing  capital  is  imposed  on  the  founders 


Evolution     of    Credit     and     Banks 

of  a  bank  only  in  order  to  provide  those  who  accept  its 
notes  as  real  money  with  a  pledge  and  guaranty  against 
the  errors  and  imprudences  that  this  Bank  may  commit 
in  the  use  of  its  notes,  or  against  any  losses  it  may  suffer 
from  admitting  doubtful  bills  to  discount;  in  a  word  (to 
use  the  technical  expression  of  commerce),  against  its  bad 
paper  (avaries  de  son  portefeuille) . 

"Since  a  bank  issues  and  must  issue  notes  only  against 
good  and  valid  bills  of  exchange,  having  two  or  three 
months  to  run  at  the  outside,  it  should  have  on  hand  in  its 
'portfolio'  in  bills  of  exchange  a  sum  at  least  equal  to 
the  notes  issued;  the  bank  is  then  in  a  position  to  with- 
draw all  its  notes  from  circulation  within  the  space  of 
three  months,  simply  as  a  result  of  the  successive  falling 
due  of  the  loans,  and  this  without  involving  any  part  of 
its  capital." 

Mollien  shows  next  that  a  bank  of  issue  must  be  a 
bank  engaging  only  in  operations  of  commercial  credit; 
that  its  administrators  must  refrain  from  all  participa- 
tion, direct  or  indirect,  in  industrial  or  commercial  enter- 
prises; and  he  expresses  himself  very  clearly  on  this  point 
as  follows:  "Discount,  as  it  is  practiced  by  a  bank  on 
everything  discountable  in  a  particular  place,  is  such  an 
important  and  deHcate  operation,  demanding  so  much 
attention,  so  much  foresight,  so  much  care,  such  minute 
observation  of  the  methods  used  by  each  tradesman,  and 
the  adjustment  of  supply  and  demand  in  each  locaUty, 
of  the  circumstances  which  may  lessen  or  increase  day 
by  day  the  credit  of  each  signer  of  a  bill  of  exchange- 
all  these  duties  are  such  that  the  operation  does  not 


39 


National    Monetary    Commission 


Evolution     of    Credit     and     Banks 


admit  the  intrusion  of  any  other  interest.  Those  who 
decide  on  discounts  are  the  judges  of  trade;  they  ought 
not  to  descend  into  the  arena  of  commerce." 

It  should  be  noted  here  that  MoUien  advocated  the 
privilege  of  the  Bank,  but  for  Paris  only.  He  did  not 
advise  extending  it  to  the  whole  of  France,  nor  did  he 
think  that  discoimts  of  provincial  banks  could  be  profit- 
ably managed  from  Paris.  He  admitted,  however,  the 
feasibiUty  of  branch  offices,  knowing  that  Napoleon  was 
in  favor  of  them;  but  the  Minister  of  the  Treasviry  in  no 
way  disguised  his  belief  as  to  the  precautions  necessary 
in  such  a  case.  Let  us  say  that  the  fears  of  MoUien  were 
not  justified.  What  explains  his  timidity  on  this  point 
is  that  the  railroads  and  telegraph  were  not  yet  in  exist- 
ence, and  commtmication  between  Paris  and  the  provinces 
was  slow  and  difficult  and  often  uncertain. 

Having  made  this  digression  to  show  the  economic 
situation  of  that  time,  and  the  attitude  of  Napoleon  and 
his  minister,  MoUien,  toward  the  Bank  of  France,  let  us 
resume  the  account  of  the  progress  of  the  Bank,  which 
we  left  at  the  end  of  1812. 

The  year  181 3  was  unfavorable.  The  Empire  was  vis- 
ibly beginning  to  decline.  The  loans  of  the  Bank  to  the 
Treasury  exceeded  340,000,000  francs.  The  discounts  fell 
to  a  total  of  less  than  30,000,000  francs.  It  is  true  that 
the  circulation  of  bank  notes  diminished  as  weU.  After 
being  at  134,000,000  francs  maximum  and  82,000,000 
francs  minimum  in  181 2,  it  fell  to  a  maximum  of 
95,000,000  francs  in  1813. 

At  this  moment  the  Bank  was  creditor  of  the  State  for 
the  amoimt  of  54,000,000  francs  (40,000,000  francs  direct 

40 


loan  and  14,000,000  francs  on  the  excises),  without  count- 
ing the  advances  on  the  obligations  of   the  collectors- 
general.     But,  in  addition,  the  Bank  possessed  a  capital  of 
35,000,000  francs  invested  in  goverimient  stock  {rentes 
d'&tat) .     How  was  this  capital  to  be  reaHzed  on  at  such  a 
critical  moment?     For  the  Bank  had  not  sufficient  avail- 
able funds  to    meet  its  engagements  payable  at   sight. 
If  we  examine  the  maxima  we  shall  see  that  the  Bank 
had  in  its  coffers  39,000,000  francs  in  specie,  but  it  owed 
at  sight  95,000,000  francs  on  bank  notes  in  circulation 
and  23,000,000  francs  on  current  accoimts  of  depositors;  in 
a  word,  39,000,000  francs  versus  118,000,000  francs.      Its 
"portfoHo"  was  not  easy  to  rediscount,  composed  as  it 
was  of  state  paper.    A  part  of  the  capital,  of  course,  was 
in  the   35,000,000  francs  invested  in  government  stock. 
But  how  was  this  stock  to  be  sold  off?    At  the  price  to 
which  it  had  then  fallen  the  Bank  would  have  lost  on  the 
purchase  price.     It  would  have  forced  the  price  of  this 
stock  stiU  lower  if  such  a  quantity  of  it  had  been  put  on 
the   market.     Finally,  the    State,  which   had   so  much 
influence    on   the   Bank,  would  not  have  allowed  this 
operation  to  be  carried  through,  because  of  the  depres- 
sion which  it  would  have  caused  on  the  Bourse.     In  the 
month  of  December  the  Bank  redeemed  notes  for  about 
40,000,000  francs.    But  as  the  crisis  grew  more  acute  the 
general  councU  of  the  Bank  asked  to  restrict  redemptions 
to  500,000  francs  a  day,  beginning  with  January  20,  18 14. 
This  state  of  things  lasted  until  April  14,  1814.     Toward 
January  20,  at  the  height  of  the  panic,  at  the  moment  of 
the  invasion,  the  Bank  borrowed  6,000,000  francs,  with- 


41 


National    Monetary    Commission 

out  which  it  would  have  been  obUged  to  suspend  pay- 
ments entirely.  This  loan,  in  all  probability,  was  made 
by  one  or  more  private  bankers  in  Paris. 

As  soon  as  the  political  crisis  was  over,  the  affairs  of 
the  Bank  resimied  their  normal  course.     Nothing  was 
modified  in  its  organization,  although  Laffitte  and  the 
general  council  had  proposed  to  bring  the  Bank  back  to 
its  original  purpose  before  it  had  become  a  ward  of  the 
State.     It  was  proposed  also  to  keep  the  exclusive  privi- 
lege of  issue  only  for  Paris,  to  give  up  provincial  branches, 
and  to  leave  the  election  of  the  governor  to  the  stock- 
holders.    But  these  plans  could  not  come  up  for  discus- 
sion.    The  Ministers  of  Finance  were  perplexed  with  too 
many  grave  problems  at  that  moment,-  and  when  Gaudin, 
former  Minister  of  Fmance  under  the  Empire,  was  nomi- 
nated governor  in  1820,  all  hope  of  Hberal  reform  took 
flight.     Two  motions  had  been  laid  before  the  Chambers 
of  Deputies  in  that  interval  (1814-1820),  one  on  Novem- 
ber 16,  1814,  the  other  on  April  13,  1818;  both  aimed  at 
a  reaction  against  the  imperial  decrees  which  had  reduced 
the  Bank  to  a  state  dependency.     These  two  plans  came 
to  nothing. 


49 


Chapter  IV. — The  Bank  under  the  Restoration — Founding 

of  departmental  hanks. 

Several  banks  have  the  privilege  of  issue  In  France.  The  departmental  banks. — 
Conditions  of  issue  imposed  on  these  three  banks.— Difllculty  of  founding 
departmental  banks. — Crisis  of  1818. — From  1818  to  1830. 

The  liberal  ideas  of  Laffitte  and  his  friends,  though  they  / 
had  not  succeeded  in  modifying  the  despotic  constitution 
imposed  on  the  Bank  by  the  Empire,  resulted  at  least  in 
several  liberal  measiu*es  in  another  quarter.  The  most 
important  was  the  establishing  of  departmental  banks. 
These  banks  also  had  the  privilege  of  issue  in  the  centers  I 
where  they  were  established  and  even  in  a  little  wider 
circle. 

They  were  of  real  service  to  the  towns  and  districts! 
where  they  were  situated.     The  need  of  them  was  all 
the  greater  because,  as  we  have  seen,  the  Bank  of  France, 
after  opening  a  number  of  branch  offices,  had  closed  them 
following  several  years  of  poor  returns. 

Three  departmental  banks  were  founded  under  the  Res- 
toration; they  were,  let  it  be  remembered,  banks  of  issue. 
Here  is  a  short  account  of  each  of  them  : 

The  Bank  of  Rou^en  (May  17,  181 7). — Capital,  1,000,000^ 
francs;  charter  to  last  nine  years;  right  of  discount  for 
Rouen,  Havre,  Paris;  right  of  paying  interest  on  deposits, 
even  sight  deposits  (it  exercised  this  right) ;  right  of  issue; 
its  charter  was  renewed  in  1826;  the  bank  increased  its 
capital  at  intervals  and  when  it  disappeared  in  1848,  for 
reasons  that  we  shall  explain  later,  the  capital  was 
3,000,000  francs. 

43 


National    Monetary    Commission 

Bank  of  ATantej.— Chartered  May  i8,  1818;  did  not 
begin  operations  until  January  i,  1822;  original  capital, 
600,000  francs;  right  to  pay  interest  on  deposits;  right 
to  discount  paper  on  all  the  markets  in  France ;  right  of 
issue;  this  bank,  too,  increased  its  capital  at  intervals;  in 
1840  it  was  3,000,000  francs.  It  restricted  its  privileges 
of  discotmt  to  Nantes,  Paris,  and  Bordeaux. 

Bank  of  ^ordeam.— Chartered  by  royal  decree  Novem- 
ber 23, 1818;  original  capital,  3,000,000  francs;  same  rights 
as  the  two  preceding  banks.  The  Bank  of  Bordeaux  went 
through  more  acute  crises  than  those  of  Rouen  and  Nantes. 
Its  capital  was  not  increased,  properly  speaking,  since 
in  1843  it  was  still  3,150,000  francs.  In  the  beginning 
it  had  great  difficulty  in  getting  the  pubHc  to  accept  its 
notes.     People  gradually  got  used  to  them,  however. 

As  we  know,  the  Bank  of  France  had  submitted  in  its 
statutes  to  no  special  conditions  for  the  issue  of  bank 
notes.  Not  so  the  departmental  banks.  In  the  first 
place,  they  had  the  privilege  of  issuing  notes  only  for 
their  headquarters  and  several  other  towns  mentioned  in 
their  statutes.  Then  the  total  of  their  engagements  pay-| 
able  at  sight  could  in  no  case  be  more  than  three  times 
the  metaUic  reserve.  But  these  banks,  contrary  to  the 
condition  imposed  on  the  Bank  of  France,  could  choose 
their  own  directors,  at  least  until  1840. 

In  order  to  estabhsh  a  departmental  bank  under  the 
Restoration,  it  was  necessary  to  obtain  the  consent  of  the 
government  offices  and  the  council  of  state.  In  the 
offices,  as  well  as  in  the  council  of  state,  there  still  pre- 
vailed the  formalism,  slowness,  and  red  tape  by  which 


44 


Evolution     of    Credit     and     Banks 

France  had  been  governed  despotically  during  the  Empire. 
On  the  other  hand,  the  Bank  of  France,  although  it  had 
closed  its  branch  offices,  did  not  see  these  new  establish- 
ments foimded  without  a  certain  anxiety.  It  used  its 
influence  on  the  central  government  to  delay  their 
creation.  So  there  were  many  obstacles  to  overcome  in 
obtaining  permission  to  foimd  a  departmental  bank. 
And,  even  when  the  permission  was  granted,  the  bank 
was  obliged  to  work  within  rather  narrow  limits.  Con- 
ditions were  imposed  on  the  directors  in  banking  stat- 
utes which  were  not  of  the  least  use  in  protecting  the 
interests  of  the  public,  and  yet  were  a  hindrance  to  the 
extension  of  business.  In  spite  of  this,  these  concerns 
prospered.  As  we  shall  see  further  on,  they  increased  in 
number  under  the  Monarchy  of  July.  The  Bank  of 
France,  alarmed  by  this  competition,  began  anew  to 
found  branch  offices  after  the  Revolution  of  1830. 

In  1818  the  Bank  suffered  a  crisis,  caused  by  the  demand 
for  capital,  made  first  by  France,  to  pay  the  indemnity  to 
the  Allies,  then  by  other  countries,  such  as  Austria,  Prussia, 
Russia,  etc.  These  loans  diminished  the  supply  of  specie, 
especially  in  the  Paris  market.  The  cash  in  the  coffers 
of  the  Bank  fell  to  34,000,000  francs  at  a  moment  when 
the  sight  liabilities  amounted  to  more  than  160,000,000 
francs.  This  time  the  Bank  did  not  ask  to  Hmit  payments, 
but  resorted  to  the  expedient  of  refusing  to  discount  all 
paper  having  more  than  forty-five  days  to  run.  The 
object  of  this  was  to  avoid  increasing  the  discount  rate, 
but  the  proceeding  is  open  to  severe  criticism.  It  would 
have  been  better  if  the  Bank  had  obeyed  the  law  of  supply 


45 


National    Monet  a  ry    Com  mjs  sion^ 

and  demand.     In  Umiting  discounts  to  short-dated  bills, 
it  embarrassed  merchants,  who  needed  money  all  the 
more,  in  that  they  had  on  hand  nothing  but  sixty  and 
ninety  day  paper.     They  would  willingly  have  paid  a 
higher  rate  for  the  credit  they  needed.    On  the  other  hand, 
in  maintaining  discount  at  the  same  rate  as  formerly 
during  a  crisis  caused  by  a  scarcity  of  specie,  the  Bank 
gave  an  undue  advantage  to  holders  of  short-dated  paper, 
and  yet  this  paper  was  not  to  fall  due  until  a  month  and 
a  half  later.     In  our  opinion,  it  is  a  great  mistake  for  a 
bank  of  issue  not  to  vary  the  rate  of  discount  according 
to  the  fluctuations  of  the  money  market. 

The  history  of  the  Bank  from  1818  to  1830  offers  no 
feature  sufficiently  noteworthy  to  serve  as  a  subject  of 
study.    The  total  of  its  issue  showed  a  tendency  to  in- 
crease.   In  1 8 1 8  its  maximum  reached  1 26,000,000  francs ; 
in  1830,  239,000,000  francs.     Its  minimum  was  87,000,000 
francs  in  1818,  and  214,000,000  francs  in  1830.      From 
1820    to   1830   the    minimum   of    circulation   or    issue 
approached  the  maximum.     There  was  a  Uke  tendency 
in  the  specie  reserve.     As  for  the  commercial  discounts, 
they  underwent  fluctuations  by  periods  lasting  several 
years;  they  diminished  from  1819  to  1824,  and  increased 
until' 1829,    at   which    time    there  was    a    depression. 
Excepting  for  the  year  1830,  this  depression  was  some- 
what visible  until  1835. 


Ill     i!i' 


46 


Chapter  V. — The  Bank  of  France  under  the  Monarchy  of 
July — Founding  of  comptoirs  or  branch  offices — Renewal 
of  the  privilege,  and  competition  with  departmental  banks. 

Discount  crisis  of  1830.— Political  causes  of  the  crisis.— Lack  of  intermediary 
bankers. — Necessary  evolution  of  credit  with  a  single  bank  of  issue  regulated  in 
its  operations.— Loans  on  securities,  1 834.— Formation  of  new  departmental  banks. — 
Plurality  of  banks  of  issue. — Branch  offices  of  the  Bank  of  France. — Crisis  of 
1836-37.— Renewal  of  the  privilege  of  the  Bank.  It  is  prepared  in  1840.— The 
representatives  of  the  departmental  banks  lay  a  request  before  the  authorities. — 
The  law  of  May  21,  1840.  Extension  of  privilege.— The  privilege  is  confined  to 
Paris. — The  balance  sheet  must  be  published  every  three  months. — The  State 
ceases  chartering  departmental  banks.— The  Bank  keeps  the  rate  of  discount 
at  4  per  cent.    Too  high  a  rate. — Capital  is  cheap. 

The  Revolution  of  1830  did  not  injure  in  the  least  the 
particular  credit  of  the  Bank.  Government  stock  did  not 
even  pass  through  the  fluctuations  usual  in  such  circum- 
stances. But  this  is  not  true  of  commerce  and  industry 
in  general.  To  reHeve  the  embarrassment  of  several  local 
markets  it  was  necessary  to  adopt  unusual  measures. 

As  the  Bank  took  paper  only  with  three  signatures,  the 
Government  used  its  influence  and  had  a  credit  of 
30,000,000  francs  voted  by  the  Chambers  on  October  17, 
1830,  to  be  applied  to  discounting  commercial  paper  with 
two  signatures.  A  provisional  establishment  was  opened 
a  few  days  after  the  voting  of  this  credit  to  handle  these 
loans.  It  bore  the  name  of  Comptoir  d'Escompte,  and 
lasted  from  October  26,  1830,  to  September  30,  1832,  or 
twenty-three  months.  It  had  received  from  the  State 
1,760,000  francs  out  of  the  appropriation  of  30,000,000 
francs.  The  city  of  Paris  was  authorized  furthermore  to 
go  security  for  this  provisional  bank  with  the  Bank  of 

47 


m 


National    Monetary    Commission 

France  to  the  amount  of  4,000,000  francs.  It  was  an 
intermediary  between  commerce  and  the  Bank;  it  fur- 
nished the  third  name,  and  rediscounted  its  paper  at  that 
estabUshment  of  issue.  In  these  twenty-three  months 
it  discounted  more  than  37,ooo  bills,  valued  at  over 
20,000,000  francs.  This  Comptoir  discounted  paper  on 
pjris  at  4  per  cent;  on  the  provinces  at  5  per  cent. 

Banks  of  the  same  nature  were  organized  in  answer  to 
the  same  needs  in  certain  maritime  centers  or  ports,  such 
as  Rouen,  Nantes,  Rochefort,  and  in  certain  manufac- 
turing towns,  such  as  Reims,  Troyes,  and  a  few  others. 

This  was  not  a  monetary  crisis,  like  the  one  of  1818, 
when  France  had  to  pay  the  foreign  armies  camped  on  her 
soil,  and  also  the  war  indemnity  exacted  by  the  allies. 
The  crisis  of  183(1^31,  which  lasted  until  about  the  middle 
of  1832,  had  a  political  cause.  The  Government  of  July 
was  not  thought  to  be  firmly  estabUshed,  and  the  ease  with 
which  the  Revolution  of  1830  had  been  accompbshed 
aroused  continual  fears  of  a  new  change  of  rule. 

The  Bank  suffered  much  from  this  state  of  things.     In 
1832  the  maximum  figure  of  its  commercial  discounts  did 
not  amount  to  more  than  30,000,000  francs.    Its  reserve, 
however,  was  very  high,  and  reached  a  maximum  of 
282,000,000  francs,  and  a  minimum  of  217,000.000.    The 
maximum  circulation  in  1832  was  258,000,000  francs,  and 
the  minimum  202,000,000  francs.    Therefore  its  bank- 
notes in  circulation  represented  for  the  most  part  the 
metaUic  reserve.     If  the  Bank  was  not  of  more  service 
then   it  is  because  intermediaries  were  lacking-that  is 
to  siy,  bankers  who  by  adding  their  own  names  to  the 

48 


Evolution     of    Credit     and     Banks 

bills  discounted  by  them,  and  akeady  bearing  two  names, 
could  rediscount  this  paper  at  the  Bank  of  France.    With 
a  system  in  which  a  single  bank  has  the  exclusive  privi- 
lege of  issue,  accepting  for  discount  paper  with  three  names 
only,  or  with  two  names  accompanied  by  collateral  secu- 
rity, intermediary  banks  of  discount  are  necessary.     We 
shall  see  this  inevitable  tendency  develop  little  by  little 
in  the  organization  of  French  banks.     Even  at  the  very 
beginning,  the  Bank  of  France  was  a  bankers'  bank. 
Later,  we  shall  see  it  become  the  bank  patronized  by  the 
credit  associations  when  its  privilege  had  been  extended 
to  the  whole  of  France.     As  business  expanded,  the  general 
activity  of  banking  operations  naturally  expanded  also 
We  shall  see,  too,  that  the  Bank  of  France  became  in  thii 
way  the  pivot  on  which  revolves  the  whole  credit  system 
of  the  country. 

The  statutes  of  the  Bank  had  permitted  it  heretofore 
to  make  loans  only  on  short-dated  state  securities-  the 
law  of  May  17,  1834,  authorized  loans  on  all  state  securi- 
ties without  stipulation  as  to  maturity.  From  this  time 
on  the  Bank  made  loans  against  deposits  of  French 
government  stocks. 

After  1835  new  departmental  banks  were  created.  In 
1835  a  departmental  bank  was  founded  at  Lyons  with  a 
capital  of  2,000,000  francs,  and  a  twenty-year  privilege  of 
issue.  The  Bank  of  Marseilles,  with  a  capital  of  4,000,000 
francs,  was  chartered  the  same  year,  and  was  very  success- 
ful- Ini837  another  one  was  opened  at  Lille,  with  a  capital 
of  2,000,000  francs.  The  same  year  that  of  Havre  was 
chartered    and  in  1838  the  Bank  of  Toulouse,  with  a 


I97I-— 10- 


49 


National    Monetary     Commission 

capital  of  120,000  francs,  and  the  Bank  of  Orleans,  with 
a  capital  of  1,000,000  francs. 

This  was  the  last  to  be  created,  as  the  Government 
refused  to  charter  any  others.  We  have  already  said 
that  the  Bank  of  France  was  naturally  suspicious  of  the 
founding  of  these  establishments,  although  its  own 
privilege  was  limited  to  Paris.  In  the  beginning,  how- 
ever, the  Bank  was  incHned  to  be  favorable  to  the  open- 
ing of  these  departmental  institutions  of  issue,  but 
afterwards  it  tried  to  keep  them  from  multiplying,  and 
set  about  organizing  branch  offices  in  the  departments. 

These  nine  departmental  banks  were  well  administered 
and  performed  much  useful  service.  It  has  been  ascer- 
tained that  in  the  very  unfavorable  year  of  1847  these 
banks,  with  a  total  capital  of  23,400,000  francs,  discounted 
commercial  paper  to  the  amount  of  850,000,000  francs — 
in  other  words,  thirty-two  times  their  capital,  whereas  the 
discounts  of  the  Bank  were  only  twenty-seven  times  its 
capital. 

These  departmental  banks,  therefore,  subsisted  under 
very  nearly  normal  conditions,  by  virtue  of  rendering 
services.  They  might  have  come  to  an  agreement  to 
make  their  bank  notes  interchangeable,  but  no  such 
thing  came  about. 

The  Bank  of  France,  from  1835  on,  opened  branch 
offices  in  certain  towns,  and  kept  on  increasing  their  num- 
ber, always  with  the  sanction  of  the  State.  They  soon 
came  vmder  the  provision  of  the  law  of  March  25,  1841. 
Branch  offices  could  not  be  formed  without  a  state 
charter.     They  were  under  the  direction  of  the  Bank. 


50 


\ 


fv 


^ 


Ev  olution     of    Credit     and     Banks 

The  general  cotmcil  of  the  Bank  fixed  the  rate  of  discount. 
The  Bank  had  the  exclusive  privilege  of  issue  in  the 
towns  where  branches  were  established.  The  notes  had 
to  be  manufactured  at  Paris  and  furnished  by  the  Bank 
in  denominations  of  not  less  than  250  francs.  Each 
branch  office  had  to  redeem  its  own  notes;  but  the 
redemption  of  a  note  from  the  central  Bank  in  Paris  by 
a  branch  was  optional;  the  same  was  true  for  Paris 
regarding  the  effects  of  the  branches.  The  directors  and 
censors  were  named  by  the  Bank;  the  governor  by  the 
State.  As  a  result  of  this  law,  15  branches  were  opened 
between  1841  and  1848. 

The  crisis  of  183^7  was  caused  by  events  in  the  United 
States.  President  Jackson  was  engaged  in  a  bitter 
struggle  with  the  Bank  of  the  United  States,  a  central- 
ized and  single  bank  of  issue.  A  business  disturbance 
resulted,  which  made  itself  felt  in  France  and  England. 
It  was  a  monetary  crisis.  The  coin  which  had  left  the 
country  during  the  last  months  of  1836  returned  grad- 
ually toward  the  end  of  1837.  The  crisis  was  not  a 
serious  one,  and  was  met  without  much  difficulty  by  the 
French  credit  institutions. 

The  privilege  of  the  Bank  of  France,  granted  at  first 
for  fifteen  years,  was  extended  by  the  law  of  April  22, 
1806,  to  twenty-five  years,  making  forty  years  in  all. 
The  Bank  began  in  1838  to  ask  for  renewal,  but  the 
question  was  not  taken  up  in  the  Chambers  until  1840. 
The  departmental  banks,  profiting  by  the  fact  that  a  law 
for  the  Bank  of  France  was  under  consideration,  tried  to 
get  more  latitude  for  their  own  transactions.    They  were 


51 


National    Monetary    Commission 

subjected  to  very  narrow  regulations,  which  cramped 
them  and  made  it  impossible  for  them  to  perform  the 
services  which  might  normally  be  expected.  No  heed 
was  paid  to  the  representatives  of  these  banks  or  to  the 
protest  that  they  made. 

The  law  of  May  21,  1840,  continued  until  December  31, 
1867,  the  privilege  of  the  Bank,  which  was  to  expire  in 
1843.  This  extension  was  granted  with  the  reservation 
that  the  privilege  could  be  changed  or  even  withdrawn 
on  December  31,  1855,  if  a  law  passed  in  one  of  the 
two  preceding  sessions  of  the  Chamber  of  Deputies  should 
so  decide.  The  capital  of  67,900,000  francs  was  officially 
recognized;  this  sum  could  neither  be  increased  nor 
diminished  except  by  law.  The  Bank  was  authorized 
to  make  loans  on  French  Government  effects  of  any 
kind  whatsoever. 

The  question  of  complete  privilege,  extending  to  the 
whole  of  France,  it  is  seen,  does  not  figure  in  the  law  of 
May  21,  1840.  It  was  understood  that  the  privilege  was 
renewed  for  Paris  only,  and  when  the  Bank  wished  to 
foimd  branch  offices  it  must  obtain  special  permission 
from  the  Government.  That  question  was  avoided;  it 
was  not  mentioned  in  the  discussions  carried  on  in  the 
Chambers. 

Strangely  enough,  the  necessity  of  pubhshing  quarterly 
reports  was  made  a  matter  of  debate,  though  it  would 
nattually  seem  that  the  first  duty  of  a  credit  establish- 
ment, especially  one  enjoying  a  privilege,  is  to  keep  the 
public  informed  of  its  operations.  It  was  decided,  then, 
that  the  Minister  of  Finance  should  publish  every  three 


52 


,  J^ 


..^ 


\ 


Evolution     of    Credit     and     Banks 

months  the  statement  of  the  Bank  averages  for  the  pre- 
ceding trimester,  and  every  six  months  the  result  of 
operations  for  the  half  year,  including  the  dividend  rate. 

It  should  be  mentioned  that  from  this  day  on  the 
State  issued  no  more  charters  for  departmental  banks. 
The  Bank  of  France,  on  the  other  hand,  increased  its 
branch  offices.  A  certain  number  were  opened  each 
year  from  1841  until  1846. 

During  the  whole  period  from  1 840-1 846  there  were 
no  disturbances  or  difficulties  of  any  kind.  The  busi- 
ness of  the  Bank  prospered,  its  credit  extended.  The 
departmental  banks,  in  spite  of  the  requests  of  their 
representatives,  failed  entirely  in  their  attempt  to  get 
more  liberty  in  their  operations. 

The  circulation  of  the  Bank  continued  to  increase 
from  1840  to  1846.  In  the  latter  year  it  reached  a 
maximum  of  311,000,000  francs  and  a  minimum  of 
243,000,000  francs.  But,  on  the  other  hand,  the  com- 
mercial discoimts  were  not  on  the  increase.  As  for  the 
specie  reserve,  it  amounted  in  1846  to  a  maximum  of 
252,000,000  francs  and  a  minimtun  of  150,000,000  francs. 

It  is  true  that  there  was  at  that  time  a  dearth  of 
business  transactions,  but  there  is  no  doubt  that  the 
Bank  held  its  discount  rate  at  too  high  a  figure,  con- 
sidering the  abundance  of  capital  from  1840  to  1846. 
Even  the  State,  finding  it  cheaper  to  borrow  elsewhere, 
did  little  business  with  the  Bank  from  1837  to  1846. 

However,  in  spite  of  this  calm,  France  was  about  to 
be  visited  by  a  succession  of  panics,  which  had  various 
causes,  in  the  midst  of  which  the  Monarchy  of  July  was 
destined  to  go  under. 

S3 


1 


\  f 


Chapter  VI. — The  beginnings  of  the  railroad  industry — 
Panics  of  1846,  184'/,  1848 — The  departmental  banks  of 
issue  are  incorporated  with  the  Bank  of  France,  which 
becomes  the  sole  bank  of  issue. 

Delay  in  constructing  railroads  in  France.  The  period  from  1823  to  1839. — The 
extension  of  the  railway  system  in  France.  The  law  of  June  11,  1842.— Call  for 
credit  for  the  construction  of  the  railroads. — Bad  crops  in  1846.  Wheat  famine 
in  France. — The  panic  of  1846-47. — Measures  adopted  by  the  Bank.— Error  of  the 
Bank. — End  of  the  financial  crisis  of  1847. — The  Bank  resumes  the  4  per  cent 
discount  rate  December,  1847.— Bills  for  200  francs.— Political  crisis  of  1848. 
Panic.— Able  and  courageous  attitude  of  the  administration  of  the  Bank  of  France 
(1848).— Forced  currency.  Decree  of  March  15,  1848.— Notes  of  small  denomina- 
tions. Their  advantages  and  disadvantages.— Comparison  of  the  crisis  of  1848 
with  that  of  1846-47.— Elements  of  time  and  place  which  must  be  considered.— 
Several  departmental  banks  issue  bills  for  25  and  50  francs.— Duty  of  a  bank  of 
Issue  in  panic  times.— Weekly  publication  of  the  Bank  balance  sheet,  hitherto 
published  only  once  in  three  months. — No  clearing  house  {chambre  de  com- 
pensation) in  Paris  at  that  time.— Departmental  banks.— Difficulties  experienced 
by  departmental  banks.  Possible  solutions  of  these  difficulties. — Incorporating  of 
the  departmental  banks  of  issue  with  the  Bank  of  France  on  April  27  and  May  2, 
1848. 

Capital  was  abundant  and  idle  in  France  from  1 840  to 
1846;  the  rate  of  interest  had  consequently  lowered.  On 
the  other  hand,  the  construction  of  the  new  means  of 
transportation — railroads — had  not  gone  on  as  rapidly  in 
France  as  in  certain  other  coiuitries.  From  February  26, 
1823,  when  the  first  grant  was  made,  until  1840,  a  little 
over  100,000,000  francs  had  been  used  for  building  rail- 
ways. In  1837  there  were  in  France  only  about  149 
kilometers  of  railroad  of  general  utility  and  27  kilometers 
of  industrial  railroads.  At  the  end  of  1841  the  Govern- 
ment had  issued  concessions  for  805  kilometers  of  indus- 
trial railroads;  it  had  itself  built  78  kilometers.  In 
reality,  at  the  end  of  1841  there  were  only  575  kilometers 
of  lines  of  general  utility  being  operated  and  65  kilometers 
of  the  industrial  lines. 

54 


I 


#*\ 


ir:* 


^t:"? 


Evolution     of    Credit     and     Banks 

The  critics  in  the  Chambers  who  blamed  the  Govern- 
ment for  not  favoring  and  making  easy  the  construction 
of  the  railways,  added  to  the  fact  that  money  was  cheap, 
induced  the  Government  to  take  action.  The  law  of  June 
II,  1842,  was  made  for  the  purpose  of  hastening  the  ex- 
tension of  railways  in  France.  It  should  be  mentioned  that 
the  State  intervened  as  the  associate  of  the  companies. 

In  1842  the  number  of  miles  of  railroad  for  which  grants 
had  been  made  was  947  kilometers,  and  4,133  kilometers 
at  the  end  of  1847.  The  lines  in  operation  had  risen  from 
665  kilometers  at  the  end  of  1842  to  1,927  kilometers  at 
the  end  of  1847. 

After  going  too  slowly  at  first  there  was  now  a  tendency 
to  go  too  fast.  The  obligations  resulting  from  grants 
made,  added  to  the  sums  already  spent,  amounted  to  a 
total  of  nearly  2,000,000,000  francs  at  the  end  of  1846. 

The  companies  had  appealed  for  large  sums,  and  peo- 
ple gradually  got  used  to  loans  that  would  not  have  been 
thought  so  easy  to  carry  through  a  few  years  before. 
And  it  was  at  this  moment  above  all  that  the  real  char- 
acter of  the  French  people  was  revealed ;  in  a  word,  their 
resolute  love  of  economy,  which  may  be  best  summed  up 
by  the  word  prudence.  This  has  been  the  mainstay  of 
France  for  the  last  fifty  years  or  more,  and  that  is  why 
recovery  came  quickly  after  the  disasters  of  the  war  of 
1870-71.  But  if  the  spirit  of  prudence  is  a  useful  factor 
in  the  wealth  of  a  country,  it  has  one  disadvantage  when 
it  is  an  only  factor:  It  destroys  or  lessens  initiative;  to 
a  certain  degree  it  paralyzes  action ;  it  does  not  dispose  to 
boldness  in  industrial  and  commercial  enterprises. 


55 


\ 


»l 


National    Monetary     Commission 

The  call  for  capital  had  lessened  the  supply  in  the  French 
market.  Another  cause  of  hard  times  arose,  too,  in  1846. 
That  year  the  crop  of  cereals  was  poor  in  most  of  the 
European  coimtries,  especially  in  France  and  England. 
These  two  countries  were  obUged  to  purchase  foreign 
grain.  The  piu-chase  of  this  product  abroad  increased  the 
figiu'e  of  current  imports  and  had  to  be  paid  for  in  specie. 
The  Bank  of  France  would,  therefore,  have  to  be  prepared 
to  see  its  metallic  reserve  diminish. 

The  extent  of  the  famine  was  imderstood  and  foreseen 
as  early  as  the  spring.  From  that  time  commerce  set 
about  making  foreign  purchases.  However,  the  Bank  did 
not  feel  the  effect  of  these  operations  until  July.  From 
1846  imtil  the  end  of  January,  1847,  the  reserve  dimin- 
ished by  173,000,000  francs.  On  December  31,  1846, 
the  specie  in  the  coffers  was  scarcely  71,000,000  francs. 
During  the  preceding  month  of  October  53,000,000  francs 
had  been  paid  out  at  the  Bank,  in  November  more  than 
43,000,000  francs;  or  nearly  100,000,000  francs  in  two 
months.  This  demand  for  specie  ceased  at  the  end  of 
January,  because  that  was  the  time  of  the  annual  return 
of  specie,  caused  by  the  falling  due  of  payments  on  sales 
made  by  exporters. 

The  Bank  then  resorted  to  unusual  means.  It  collected 
at  great  expense  about  2,000,000  francs  in  specie  from  the 
departments,  and  sacrificed  its  government  stock  to  make 
the  purchase  of  about  45,000,000  francs'  worth  of  bullion. 
These  meastu*es  were  excellent  in  principle  and  due  to 
the  prudence  of  the  Bank's  management,  but  they  were 
not  all  equally  useful.     At  any  rate  the  surrender  of 


56 


Evolution     of    Credit     and     Banks 

50,000,000  francs  capital  in  the  form  of  government  5 
and  3  per  cents,  payable  in  Russia,  was  not  necessary, 
for  at  that  moment  the  reserve  had  gone  up  again  to 
110,000,000  francs.  This  transaction  with  the  Russian 
Empire  resulted,  however,  in  making  a  better  rate  of 
exchange  for  the  French  importers. 

The  Bank  made  the  mistake  of  increasing  too  late  the 
rate  of  discount.  It  had  maintained  it  at  4  per  cent  for 
a  long  time,  when  the  current  rate  was  less.  Then  the 
Bank  kept  the  rate  at  4  per  cent  during  the  whole  time 
of  the  panic  and  put  it  up  to  5  per  cent  January  14,  1847. 
It  should  have  raised  it  sooner  and  not  at  the  time  when 
all  the  metallic  deposits  were  commencing  to  flow  in. 
Without  any  question,  a  privileged  bank,  for  the  very 
reason  that  it  is  privileged,  ought  not  in  time  of  crisis  to 
limit  discounts  in  order  to  save  its  reserve  at  all  costs. 
It  ought  to  serve  commerce  and  not  tend  to  restrict  its 
issue.  It  should  supply  credit  abundantly;  the  privilege 
makes  this  a  duty.  This  being  the  case,  the  Bank  came 
to  the  rescue  too  late. 

The  failiu-e  of  three  railroad  companies  lessened  the 
expenditures  on  great  pubUc  works. 

All  the  operations  of  the  Bank  at  the  time  of  the  panic 
just  described,  together  with  the  slackening  of  work  on 
the  railroads  (and  also  the  gradual  disappearance  of  the 
difficulties  coming  from  the  grain  famine  of  1846),  helped 
to  restore  business  to  its  normal  course.  At  the  end  of 
December,  1847,  the  Bank  resumed  the  4  per  cent  dis- 
coimt  rate  that  it  had  always  maintained  since  1822. 
This  stabiHty  may  well  seem  strange,  because  in  the  space 


57 


National    Monetary     Commission 

of  twenty-five  years  the  price  of  capital,  even  in  a 
calm  market,  must  necessarily  vary.  A  fixed  discoimt 
rate  has  certain  important  advantages;  it  enables  com- 
merce to  calculate  the  price  of  discount  in  advance 
and  to  make  a  very  nearly  exact  forecast  of  costs  in  its 
plans.  But,  on  the  other  hand,  a  bank  of  issue,  placed 
in  a  position  to  see  the  fluctuations  of  capital  and  the  needs 
of  commerce,  should  warn  the  merchants,  its  patrons, 
and  the  whole  body  of  people  having  business  interests,  of 
the  change  in  the  state  of  credit.  It  should  signal  any 
degree  of  scarcity  by  raising  the  rate  of  discount.  At 
times  this  increase  is  nothing  more  than  a  warning,  in 
which  case  it  should  be  slight.  In  certain  other  cases, 
when  money  is  easier,  the  Bank  must  not  hesitate  to 
lower  the  rate  of  discount.  In  fact,  the  discount  rate 
of  a  bank  of  issue,  especially  if  it  is  the  only  one  and  with 
a  privilege,  is  a  sort  of  official  barometer  which  private 
banks  consult  in  fixing  their  own  disount  rate.  *  As  these 
private  banks  may  rediscount  their  commercial  paper  at 
the  bank  of  issue,  they  usually  follow  its  discount  rate. 
This  was  especially  the  case  until  the  great  credit  com- 
panies began  to  make  discounts  on  a  vast  scale  with  the 
large  deposits  that  the  public  gradually  entrusted  to  them. 

The  law  of  June  lo,  1847,  reduced  the  denomination  of 
the  smallest  bill  issued  by  the  Bank  of  France  to  200 
francs.  These  bills  were  not  put  in  circulation  until  the 
28th  of  the  following  October. 

If  the  Bank  of  France  was  no  longer  seriously  disturbed 
by  the  crisis,  the  trouble  was  not  entirely  at  an  end  for  com- 
merce, which  was  still  straightening  out  business  entangle- 


I 


Evolution     of    Credit     and     Banks 

ments  and  asking  for  credit  and  specie  from  the  private 

banks. 

When  the  revolution  of  1848  broke  out,  on  February  24, 
these  private  bankers  lost  their  heads  completely.  They 
wrote  to  their  correspondents  in  the  provinces  that  they 
were  obliged  to  stop  business  and  go  into  Hquidation. 
This  decision  increased  the  panic  in  Paris,  and  caused  it 
to  spread  to  the  departments,  where  commerce  and  the 
banks  had  been  disposed  to  stand  up  against  the  shock. 

The  Paris  merchants,  seeing  this  defection,  appUed  to 
the  new  government  for  aid.  The  latter  decreed  on 
March  7,  1848,  the  formation  of  the  discount  bank  {Comp- 
toir  d'Escompte)  which  we  shall  study  later. 

Meanwhile,  the  Bank  of  France  alone  was  left  standing 
to  bear  the  brunt  of  the  crisis.  It  faced  the  situation 
with  courage  and  abiUty.  The  Paris  bankers,  we  have 
said,  were  overcome  by  fear,  and  having  already  rashly 
engaged  their  resources,  could  not  come  to  the  aid  of  com- 
merce. The  Bank,  well  advised  at  this  conjuncttue,  did 
not  restrict  discoimt  and  did  not  increase  the  discount 
rate,  which  still  remained  at  4  per  cent.  In  sixteen  week 
days,  from  February  26  to  March  15,  the  Bank  discounted 
bills  for  1 10,000,000  francs.  The  Treasury  happened  to 
need  money  and  withdrew  the  sum  of  77,000,000  francs 
from  its  current  account,  where  it  had  a  credit  balance  of 
125,000,000  francs.  The  provincial  branches  followed  the 
same  course.  In  the  same  space  of  time  they  discounted 
commercial  bills  for  43,000,000  francs,  and  in  addition  put 
1 1 ,000,000  francs  at  the  disposal  of  the  public  services  for 
the  most  urgent  needs. 


58 


59 


! 


National    Monetary     Commission 

Meanwhile,  the  Bank  of  France  found  itself  in  the 
presence  of  a  political  panic  which  no  argument  could 
calm.  It  resisted  the  shock  without  flinching.  Between 
February  26  and  the  evening  of  March  14  the  metallic 
reserve  fell  from  140,000,000  francs  to  70,000,000  francs;  on 
the  evening  of  the  15th  it  had  fallen  to  59,000,000  francs. 

Under  these  conditions  the  general  council  of  the  Bank 
asked  the  Government  (i)  that  the  bank  notes  should 
have  forced  currency  (or  forced  rating) — that  is  to  say, 
that  the  Bank  should  no  longer  be  obliged  to  redeem 
them  in  specie;  then,  that  they  should  be  considered  legal 
tender  throughout  the  whole  country — in  other  words, 
that  every  creditor  should  be  obliged  to  receive  them  in 
payment  of  a  debt,  private  individuals  as  well  as  the 
financial  agents  of  the  state;  (2)  that  the  Bank  of  France 
be  permitted  to  issue  loo-franc  notes  (200-franc  notes  had 
already  been  authorized,  as  we  have  seen,  by  the  law  of 
June  10,  1847).  In  panic  times  when  coin  is  either  scarce 
or  hoarded  the  advantage  of  small  notes  is  considerable, 
since  they  make  it  possible  to  settle  small  transactions. 

It  was  even  proposed  to  issue  bills  of  still  smaller  de- 
nominations, such  as  50  and  2 5 -franc  notes.  But  the 
general  council  of  the  Bank  objected,  saying  that  the  issue 
of  bills  for  50  and  25  francs  would  send  the  metallic 
money  out  of  the  country,  causing  it  to  be  exported. 
This  problem  can  not  be  solved  a  priori.  It  is  important 
to  know  in  time  of  crisis  whether  the  scarcity  of  coin  is 
caused  by  a  serious  lessening  of  the  national  metallic 
supply,  brought  about,  for  example,  by  unfavorable  ex- 
changes over  a  considerable  space  of  time,  or  by  an  excess 


60 


Evolution     of    Credit     and     Banks 

of  speculation.  In  the  latter  case  the  supply  of  metallic 
money  may  not  have  diminished,  but  as  transactions  can 
no  longer  be  settled  except  in  coin  in  a  large  measure, 
coin  is  more  in  demand  and  becomes  scarce.  But 
if  the  scarcity  of  coin  is  due  to  a  political  panic,  as  in 
1848,  when  everyone  was  afraid  of  being  dispossessed  of 
his  property,  then  it  is  a  question  of  hoarding.  The  hold- 
ers of  coin  hide  as  much  precious  metal  as  they  can,  judg- 
ing that  this  is  wealth  par  excellence,  the  wealth  that  can 
be  taken  along  in  case  of  flight  to  a  foreign  country. 

In  1848,  the  crisis  was  political  rather  than  commercial. 
It  had  not  the  same  causes  as  the  one  of  1846  and  1847, 
which  was  produced  by  the  flow  of  coin  abroad  to  pay 
for  wheat  bought  in  Russia  and  elsewhere  as  a  result  of 
the  grain  famine  in  France.  The  famine  extended  to 
England,  so  that  both  the  Paris  and  London  markets  were 
deprived  at  the  same  time  of  their  supply  of  metallic 
money  for  their  foreign  payments.  In  1848  it  was  the 
political  panic  that  made  people  hide  crowns  and  gold 
pieces.    . 

But  in  a  land  where  the  memory  of  assignats  was  barely 
50  years  old,  people  were  terrified,  and  it  would  have  been 
useless  to  issue  50  and  2 5 -franc  notes;  in  any  case,  can  we 
reproach  the  Bank  for  not  consenting  to  the  issue  of  small 
notes  ?  We  do  not  think  so.  At  this  time  the  Bank  had  not 
yet  the  privilege  of  issue  for  the  whole  of  France ;  it  was  face 
to  face  with  a  provisional  government ;  the  existing  means 
of  information  and  communication  did  not  make  it  possi- 
ble to  keep  precise  track  of  affairs  in  provincial  France  and 
in  foreign  countries.  The  members  of  the  general  council 
thought  that  the  loo-franc  notes  were  probably  small 

61 


II 


/' 


\ 


National    Monetary     Commission 

enough,  for  the  reason  that  they  viewed  bank  notes  pri- 
marily as  paper  money  for  the  use  of  bankers  or  merchants, 
while  bills  of  the  denominations  of  50  and  25  francs  were 
intended  for  private  individuals — for  the  small  trade  which 
was  not  friendly  to  credit  paper  and  was  more  easily  agi- 
tated and  thrown  into  a  panic.  However,  it  should  be 
pointed  out  that  in  1848  it  was  the  biggest  bankers  in 
Paris  who  took  fright  and  suspended  payments. 

Questions  of  credit,  both  in  normal  and  abnormal  times, 
involve  psychological  elements  peculiar  to  each  nation, 
and  these  must  be  carefully  taken  into  accoimt.  The 
compass  of  credit  which  normally  points  due  north  runs 
wild  and  is  no  longer  a  guide  in  panic  times. 

However,  it  is  worthy  of  note  that  the  representatives 
of  the  Government  in  the  provinces,  having  been  invested 
in  some  sort  with  dictatorial  powers,  gave  the  depart- 
mental banks  permission  to  issue  notes  for  50  francs,  and 
even  for  25.  These  bills  were  circulated,  especially  at 
Marseilles,  not  only  in  banking  and  commercial  circles, 
but  also  among  the  public.  But  if  the  Bank  did  not 
consent  to  issue  small  bills,  it  had  nevertheless  the  good 
sense  to  give  specie  for  the  payment  of  workingmen  and 
employees,  as  well  as  for  the  purchase  of  provisions.  It 
made  use  of  its  notes  for  current  commercial  needs,  for 
settling  accounts,  for  credit  transactions. 

The  general  cotmcil  of  the  Bank  asked  permission, 
besides,  to  increase  the  issues  to  a  maximum  of 
350,000,000  francs.  This  was  the  necessary  complement 
of  the  first  two  measures.  Moreover,  it  is  not  in  panic 
times  that  the  total  of  the  issues  of  a  bank  of  circulation 


62 


Evolution     of    Credit     and     Banks 

should  be  reduced  or  rendered  stationary.  Its  function 
is  more  useful  at  this  moment  than  at  any  other;  the 
bank  should  create  credit  with  its  notes,  being  careful  to 
discount  nothing  but  substantial  commercial  paper.  In 
this  way  commercial  houses  which  are  worthy  of  credit 
are  saved  from  sudden  liquidation. 

The  Bank  reaUzed  the  necessity  of  not  cutting  off 
supplies  from  commerce  and  industry  at  the  critical 
moment.  It  came  to  the  rescue  inteUigently,  and  had  no 
occasion  to  regret  it.  In  this  time  of  general  confusion 
the  Bank  was  ably  directed. 

Nothing  is  more  calculated  to  inspire  confidence  in  a 
credit  establishment  than  the  frequent  publication  of  its 
true  situation.  This  is  its  bill  of  health,  and  it  ought 
to  state  its  condition  with  great  accuracy.  For  if  the 
balance  sheet  indicates  a  falling  off  in  one  general  direc- 
tion, or  an  unusual  increase  in  another,  the  public  is  fore- 
warned, and  this  estabhshment  may  be  justified  by  these 
facts  in  adopting  measures  which  the  pubhc  would  not 
otherwise  understand. 

There  was  no  clearing  house  in  Paris  at  that  time. 
The  one  which  exists  to-day  was  not  founded  until  1872. 
Checks  were  used  little  or  not  at  all ;  their  clearly  defined 
legal  existence  hardly  antedates  the  law  of  August  14, 
1865.  The  departmental  banks,  being  also  affected  by 
the  panic  of  1848,  asked  for  a  forced  currency  for  their 
notes  and  an  increase  in  the  total  of  their  issues,  which 
had  been  fixed  by  law  without  regard  to  their  capital. 

These  measures  were  a  mistake,  because  these  depart- 
mental banks  could  not  circulate  their  notes  except  in  the 


63 


•:| 


i 

V 

} 


National    Monetary     C  ommission 

towns  where  they  were  severally  located.  These  notes 
were  nothing  but  local  currency;  forced  currency,  there- 
fore, of  no  use  in  bringing  about  a  transfer  of  specie  from 
one  town  to  another.  The  financial  agents  of  the  State 
could  not  take  these  notes,  since  they  were  not  cturent  in 
Paris;  they  could  not  send  them  to  the  Minister  of  Finance. 
The  Bank  of  France,  on  the  other  hand,  through  its  branch 
offices,  which  used  its  notes,  could  make  these  moves. 
For  the  departmental  banks  they  were  disastrous;  they 
created  difficulties  which  brought  about  their  disappear- 
ance and  their  merging  with  the  Bank  of  France.  The 
mistake  of  the  departmental  banks  in  asking  for  a  forced 
currency  was  in  not  asking  at  the  same  time  for  the 
unification  or  uniformity  of  their  notes.  Inasmuch  as 
their  currency  became  forced  and  their  maximum  issue 
was  fixed  by  the  State,  and  inasmuch  as  bills  were  noth- 
ing but  paper  money,  it  would  have  been  necessary  to 
make  them  identical  for  all  the  banks.  But  the  best 
operation  of  all  would  have  been  to  have  their  commer- 
cial paper  rediscotmted  by  the  Bank  of  France  in  return 
for  its  bills.  Then,  when  depositors  came  to  these  estab- 
lishments to  ask  back  their  ftmds,  they  could  have  been 
reimbursed  in  money  which  was  legal  tender  everywhere. 
There  was  an  imdoubted  error  and  lack  of  foresight  on 
the  part  of  the  departmental  banks.  They  had  failed  to 
use  the  most  elementary  prudence  in  not  arranging 
among  themselves  for  the  exchange  on  demand  of  their 
notes. 

This  fusion  was  accomplished  by  two  decrees.     The  first 
authorized  the  merging  with  the  Bank  of  France  of  the 


64 


I 


Evolution     of    Credit     and     Banks 

banks  of  Rouen,  I^yons,  Havre,  I^ille,  Orleans,  Toulouse, 
and  Marseilles,  and  the  decree  of  May  2  merged  the  banks 
of  Nantes  and  Bordeaux. 

Here  are  a  few  figures  relating  to  these  nine  banks  to 
show  their  importance  as  a  whole.  Their  total  capital 
amounted  to  23,350,000  francs. 

[Million  francs.] 


Year. 


1840 
1843 
Z844 
1846 

1847 


Average 

of 
metallic 

Average 
discounts. 

reserve. 

23.9 

50.0 

32-4 

55.8 

36.6 

64.  a 

43-7 

77- a 

41.7 

85.0 

* 

Average 
circulation. 


54.7 

66.9 
74-3 
86.  s 
90.  I 


They  had  all  made  profits  for  shareholders.  The  bank 
of  Lyons  yielded  a  dividend  of  nearly  29  per  cent  in  1847. 

The  crisis  led  to  their  disappearance,  and  estabUshed, 
in  fact,  the  monopoly  of  the  Bank  of  France  as  a  bank 
of  issue.  The  latter  owed  this  advantage  to  the  ability 
of  its  administrators,  to  the  lack  of  cooperation  among 
the  departmental  banks,  and,  finally,  to  the  tendency  of 
the  French  to  centralize  everything. 


1971 — 10 


65 


k'.!ii 


Chapter  VII.— A  brief  survey  of  the  general  course  of  busi- 
ness during  the  first  half  of  the  nineteenth  century— Credit 
and  industrial  beginnings. 

Influence  of  individual  directors  in  the  administration  of  a  bank.-The  influence  of 
M  T  KGautier,  deputy-governor  of  the  Bank,  on  the  preceding  events.-A  glance 

baikward.-Comparison  of  French  foreign  conunerce  before  the  Revolution  and 
during  the  first  thirty  years  of  the  nineteenth  century.-Railroad  beginnings  -Eco- 
nomic movement  created  by  railroads.-Foreign  trade  develops.-It  doubles  in 
seventeen  years.-Progressive  increase  of  the  operations  of  the  Bank  of  France.- 
Kind  of  credit  to  be  given  by  a  bank  of  issue.    Commercial  credit.-Loans  on  secu- 
rities -The  kind  of  credit  a  bank  of  issue  should  not  give.    Industrial  loans.-Dan- 
Eers  of  certain  inconvertible  funds  for  banks  of  issue. -Foundation  o^  industrial 
foan  banks  (comman<i*/e).-TheCaisse  G6n6raledu  Commerce  etdel  Industrie, 
founded  by  Laffitte.-Issue  of  sight  biUs  to  bearer  and  to  order  by  J.  Laffltte.-Inevi- 
table  disappearance  of  this  concern  in  the  panic  of  1847.-Services  rendered  by 
Laffitte's  bank.-Other  establishments,  modeled  after  the  Caisse  Laffitte.-These 
establishments  disappear.-Causes  of  their  failure.-Panic  of  1848.   Joimdhig  of 
Comptoirs  d'Escompte  by  the  provisional  government  of  1848.-The  Comptoir 
d'Escompte  of  Paris  and  the  provincial  Comptoirs.    Their   basis.-Loans  on 
collateral.     Creation    of    surety   companies.     {Sous -com ptmrs   de  oaranti^) 
Beginnings  of  the  Comptoir  d'Escompte   from   March  4  to  August  31,  1848.- 
Provincial  Comptoirs.-Important  fact.    The  general  warehouses. 

The    Bank  of  France   became  a  sole   bank  of  issue, 
much  more  as  a  resuh  of  unforeseen  circumstances  than  by 
reason  of  any  consistent  plan  or  fixed  poUcy.     Singularly 
enough,  it  was  a  revolutionary  government  which  in  actual 
fact  was  largely  responsible  for  handing  over  to  the  Bank  of 
France  its  complete  monopoly.     It  was  during  a  poHtical 
crisis  when  the  theories  most  subversive  to  capital  were 
put  forward  that  the  directors  of  the  Bank  showed  the 
most  decision  and  daring.     To  be  sure,  the  directors  had 
before  them  the  example  of  past  panics.     However,  it  is 
important,  too,  to  take  into  account  the  moral  and  tech- 
nical worth  of  the  men  who  direct  an  establishment.     At 
the  time  of  the  panics  of  1846,  1847,  and  1848  the  gov- 
ernor of  the  Bank  was  Count  d'Argout,  who  had  been 

66 


i "  I  k 


%  '«. 


Evolution     of    Credit     and     Banks 

nominated  September  5,  1836,  and  remained  in  oflSce 
until  June  10,  1857.  It  would  seem  that  this  personage 
was  not  remarkable,  at  least  in  a  business  way.  But  he 
had  with  him  a  deputy  governor  named  J.  E.  Gautier, 
who  had  formerly  been  a  deputy  from  la  Gironde  and  a 
peer  of  France.  Gautier  was  very  well  up  in  affairs  of 
credit.  He  had  been  nominated  first  deputy  governor  in 
1833,  and  held  the  post  until  August,  1857.  He  published 
astudyof  the  first  order  entitled:  "Banks  and  Credit  Insti- 
tutions in  America  and  Europe,"^  in  which  are  found  the 
true  qualities  of  a  banker  who  is  thoroughly  well  informed 
in  the  proper  duties  of  a  bank  of  issue.  J.  E.  Gautier 
published  this  study  in  1839,  six  years  after  entering  the 
Bank;  without  any  doubt  he  had  a  predominating  influ- 
ence on  the  conduct  of  affairs  at  difficult  moments. 

The  French  Revolution  was  the  bankruptcy  of  royalty 
much  more  than  the  bankruptcy  of  France  itself.  The 
state  finances  were  in  a  disastrous  situation,  but  French 
society,  considered  in  its  economic  elements,  was  flourish- 
ing, although  hampered  by  narrow  and  antiquated  legis- 
lation. These  obstacles,  imposed  by  the  ancient  mould 
of  a  decrepit  organization,  were  all  the  more  felt  because 
France  experienced  the  same  need  of  expansion  that  was 
beginning  to  torment  the  other  great  civilized  nations  of 
the  world  at  that  time. 

As  for  foreign  commerce,  according  to  trustworthy  esti- 
mates, it  might  be  fixed  at  the  end  of  the  reign  of  Louis 
XVI  at  about  1,000,000,000  francs,  probably  even  a  little 
more.     Under  the  First  Empire,  with  boundaries  much 

^Des  Banques  et  des  institutions  de  credit  en  Amerique  et  en  Europe,  pub- 
lished in  the  EncyclopSdie  du  Droit,  Vol.  II.  • 

67 


National    Monetary    Commission 


^^^  •  _  

Evolution     of     Credit     and     Banks 


wider,  it  amounted  to  only  933,000,000  francs.  Under 
the  Restoration,  if  general  commerce  is  considered,  it 
reached  that  figure  only  in  1825.''  At  any  rate  during  the 
whole  Restoration  period  special  commerce  did  not  reach 
a  biUion.     Its  highest  figure  was  987,000,000  francs  in 

1829. 

Let  us  note  that  the  imports  which  furnished  the 
country  raw  materials  for  manufacttires  did  not  equal 
until  1830  the  total  of  imports  of  1788 ;  that  is,  573,000,000 

francs. 

So  it  took  France  forty  years  to  regain  the  ground 
that  it  had  lost  in  the  world's  market.  It  is  enough  to 
tell  briefly  why  this  recovery  was  so  slow  and  tedious 
after  the  terrible  years  of  the  Revolution.     The  reasons 

are: 

The  wars  of  the  Constdate  and  the  Empire,  which  gave 
little  opportunity  for  estabUshing  lasting  international 

relations. 

The  restrictive  measures  adopted  by  Napoleon  against 
foreign  commerce  (continental  blockade,  etc.). 

The  changes  of  government  and  the  two  invasions  of 

1814  and  1815. 

The  payment  of  indemnities  to  the  allies,  and  the 
process  of  recovery  of  the  country  after  the  defeat  and 
the  struggles  of  the  various  political  parties. 

The  ultra-protectionist  measures  adopted  by  the 
Restoration. 


o  General  commerce  {commerce  geniral)  includes:  (i)  Special  com- 
merce; (2)  transitory  commerce — that  is,  merchandise  which  merely 
passes  through  the  country.  The  precious  metals  are  not  included  in 
these  figures. 


In  1830  the  usefulness  of  railroads  begins  to  dawn 
and,  the  possibilities  of  the  steam  engine.  In  France  the 
new  method  of  transportation  foimd  many  opponents. 
It  was  not  until  1841  that  the  railroads  began  to 
have  an  economic  effect  on  transportation  and  trade. 
Here  is  a  table  which  shows  their  slow  advance  until 
1847: 


Year 


1841 
Z843 
1843 
X844 
184s 
1846 

1847 


Number  of 
kilometers 
in  opera- 
tion. 

Gross  re- 
ceipts, in 
million 
francs. 

Net  re- 
ceipts per 
kilometer, 
in  thousand 
francs. 

Number  of 
passengers, 
in  millions. 

573 

13.9 

9.3 

6.3 

600 

14.  3 

8.8 

6.3 

839 

31. 0 

13-4 

7.3 

831 

38.3 

17.3 

8.1 

880 

31.9 

18.8 

8.8 

1.322 

41. 1 

30.  6 

10.4 

1.832 

65.  2 

32.  4 

13.8 

Tons  of 
merchan- 
dise, in  mil" 
lion  tons. 


It  is  plain  that  the  influence  of  the  new  transportation 
upon  the  movement  of  merchandise  was  very  slight,  since 
in  1847  these  railwavs  had  transported  only  3,500,000 
tons.* 

But  the  construction  of  these  lines  had  brought  about 
great  business  activity  in  the  matter  of  borrowing  capital 
and  piu-chasing  the  raw  materials  necessary  for  the 
building  as  well  as  for  the  purchase  or  construction  of 
equipment.  The  railroad  was  not  only  a  stimulus  for 
commerce  and  industry,  but  it  was  itself  an  industry,  and 
one  of  the  largest,  even,  in  each  country  by  virtue  of 
the  capital  engaged  and  the  horsepower  of  its  locomo- 
tives.    In    other    directions,    through    new    inventions, 


o  The  French  ton  is  1,000  kilograms. 


68 


69 


National    Monetary    Commission 

through  the  increase  of  comfort  under  the  Government 
of  July  (1830- 1 848),  domestic  trade  was  developed  at 
the  same  time  as  foreign  trade.  Industry  was  influenced 
by  this  fact;  it  became  concentrated;  large  enterprises 
were  founded;  moderate-sized  enterprises  consolidated 
in  response  to  the  new  conditions  of  the  manufacturing 
industry  in  which  steam  engines  and  power  looms  were 
henceforth  the  chief  factors. 

Here  are  figures  giving  the  increase  of  our  foreign  com- 
merce from  1830  to  1847: 

[Million  francs.] 


Evolution     of    Credit     and     Banks 


Year. 


1830 

1835 
1840 

1845 
1846 

1847 


General 
commerce. 

Special  commerce. 

Exports. 

Imports. 

I.  311 

489 

453 

I.  595 

520 

577 

2,063 

747 

695 

2.428 

856 

848 

2.437 

9ao 

852 

2.339 

956 

720 

Total. 


94  a 

1.097 
1,442 

1,704 
1,772 
1.676 


Commerce,  then,  doubled  in  seventeen  years — general 
commerce  as  well  as  special  commerce ;  there  was  a  falling 
off  in  1847  only  because  of  the  crisis.  However,  the  im- 
portations in  1847  and  in  1846  increased  because  of  the 
purchase  of  foreign  grains  during  the  famine.  What  were 
the  principal  transactions  of  the  Bank  of  France  dviring 
these  seventeen  years  ?  The  interesting  point  is  to  see  the 
total  of  its  yearly  discounts  and  the  discount  rate.  We 
will  give  merely  the  figures  for  each  five  years,  except  for 
the  last  two  years,  1846  and  1847 — at  the  panic  time. 


Discount  of  commercial  paper. 
[Million  francs.] 


Year. 


1830 

1835 
1840 

184s 
1846 

1847 


Paris. 


909 

485 

932 

1.007 

1. 194 

I.  136 


Branches. 


179 
396 

431 
481 


Total. 


909 

485 

1. 112 

1.403 
1,62s 

1. 817 


Rate  of 
discount. 


Per  cent. 

4 
4 
4 
4 

4 


The  total  of  discounts  in  1848  was,  however,  less  than 
that  of  1847,  and  amounted  to  only  1,544,000,000  francs. 
The  average  reserve,  which  was  145,000,000  francs  in 
1830,  was  in  1840  nearly  247,000,000  francs;  in  1846, 
210,000,000  francs,  and  fell  in  1847  to  122,000,000  francs, 
then  went  up  in  1848  to  an  average  of  176,000,000  francs. 

As  for  notes  in  circulation,  their  averages  were :  In  1830, 
223,500,000  francs;  in  1840,  223,500,000  francs  (the  same 
figure);  in  1846,  271,000,000  francs;  in  1847,  251,000,000 
francs;  in  1848,  342,000,000  francs. 

The  signs  of  an  increasing  economic  movement  were  not 
lacking.  However,  the  Bank  of  France,  a  bank  of  issue, 
gave  and  could  give  in  that  period  of  industrial  and  com- 
mercial growth  nothing  but  so-called  commercial  credit, 
discounting  commercial  paper  having  a  maximum  matu- 
rity of  three  months.  A  bank  of  issue,  which  must  always 
redeem  its  notes  on  demand,  would  be  taking  risks  if  it 
immobilized  or  rendered  inconvertible  its  capital  in  other 
imcertain  operations.  There  is,  indeed,  one  other  opera- 
tion, that  of  loans  on  securities,  but  here  everything  de- 
pends on  the  nature  of  the  securities  and  the  sum  loaned 


n 


70 


71 


National    Monetary     Commission 


Evolution     of    Credit     and     Banks 


U 


in  relation  to  the  quoted  value  of  the  security  on  the 
Bourse.  This  operation  may  be  a  good  one,  or  it  may 
serve  as  a  pretext  for  very  risky  transactions,  for  there  is 
a  tendency  here  to  tie  up  capital  if  the  security  deposited 
as  collateral  has  not  a  current  value  on  the  stock  market 
and  can  not  be  easily  sold  or  realized  on  if  need  be. 

Therefore,  a  bank  of  issue  can  only  make  advances  on 
securities  of  recognized  value,  which  are  not  hkely  to 
depreciate  easily.  In  reality,  a  bank  of  issue  must  not 
and  can  not  finance  {commandite)  industrial  enterprises; 
that  is  to  say,  lend  capital,  in  any  form  whatsoever,  to 
\  create  or  transform  an  industry.  This  kind  of  operation 
demands  many  months  and  even  years,  usually,  to  give 
results.  Meanwhile,  the  capital  is  tied  up,  and  can  not 
be  used  in  case  of  need  to  redeem  the  bank  notes,  which 
should  above  all  represent  (i)  either  specie  in  the  vaults, 
(2)  or  commercial  discounts  which  can  be  speedily  con- 
verted into  money,  or,  finally,  (3)  negotiable  securities,  but 
for  small  sums  only. 

Also,  when  banks  of  issue  hold  government  securities 
to  represent  their  notes,  they  have  in  reality  nothing  but 
inconvertible  funds.  For,  in  case  of  a  panic,  they  would 
hesitate  to  flood  the  market  with  a  quantity  of  these 
securities  all  at  one  time;  seciu-ities  or  government  stock 
would  depreciate  as  a  result  of  being  offered  suddenly, 
thus  diminishing  the  credit  of  this  particular  Government, 
most  probably,  too,  at  a  moment  of  poHtical  crisis  or  war, 
exactly  when  the  State  needed  all  its  credit. 

The  Bank  of  France  did  not  depart  from  this  line  of 
conduct.  If  in  1848  it  helped  industry  to  some  extent 
during  the  panic,  it  was  with  prudence. 

72 


There  was  a  lack,  therefore,  of  credit  concerns  in  France 
to  aid  the  progress  of  industry  in  general,  and  the  railroad 
industry  in  particular. 

Several  of  these  concerns  were  founded  under  the  pres- 
sure of  stUTOunding  circumstances.  People  began  to 
reaUze  vaguely  that  new  economic  conditions  were  de- 
manding new  forms  of  credit.  But  it  will  be  seen  that 
these  estabHshments,  although  they  were  useful,  were  not 
fitted  for  the  part  they  were  supposed  to  play. 

One  of  the  most  important  of  them  was  the  one  called 
the  Caisse  Ginhale  du  Commerce  et  de  VIndustrie,  founded 
by  Jacques  Ivaffitte,  who  for  a  long  time  had  had  a  com- 
mercial bank,  and  then  had  been  ruined  by  engaging  in 
politics.  He  then  gave  up  pubhc  affairs  and  worked  to 
found  a  bank  of  a  new  kind,  intended  to  aid  industrial 
development. 

Like  all  the  concerns  of  this  kind  founded  then,  it  was 
chartered  under  the  form  of  a  limited  Uabihty  stock  com- 
pany {sociHe  en  commandite  par  actions) ,  since  the  Council 
of  State  was  unwilling  to  charter  banking  concerns  under 
the  form  of  joint-stock  companies.  The  Caisse  Genkrale 
du  Commerce  et  de  V Industrie  opened  its  offices  October 
7,  1837.  Its  nominal  capital  was  55,000,000  francs;  the 
capital  paid  in  was  only  15,000,000  francs,  itself  a  very 
large  sum  for  that  time.  The  foundations  of  this  credit 
concern  were  very  broad,  too  broad  even,  for  it  was 
to  engage  in  all  kinds  of  financial  operations,  take  all 
kinds  of  risks.  This  was  a  new  idea,  and  demanded  a 
well-defined  and  rigorous  method  of  procedure — the  use 
of  its  own  capital  to  the  exclusion  of  deposits  in  running 


73 


• 


National     Monetary     Commission 

accounts,  which  are  too  mobile  to  be  used  for  backing 
up  and  financing  industries.  This  house  made  discounts 
and  collections,  received  nmning  accounts,  made  loans 
on  securities,  and  advanced  funds  for  silent  partner- 
ships in  industrial  enterprises,  handled  state  loans,  etc. 
In  spite  of  the  monopoly  of  the  Bank  of  France,  Laffitte 
also  wanted  to  issue  a  sort  of  credit  paper  of  his  own, 
with  a  view  to  aiding  the  operations  of  his  house.  To  get 
aroimd  the  difficulty,  he  decided  to  issue  sight  bills  to 
bearer  and  to  order.  As  for  time  of  maturity,  there  were 
several  kinds,  such  as  five,  fifteen,  and  thirty-day  notes. 
These  bills  bore  an  increasing  interest,  according  to  the 
length  of  time  of  matiuity.  They  could  not  circulate  ex- 
cept with  an  indorsement  in  blank.  For  interest-bearing 
notes,  the  interest  to  date  was  added  at  each  transfer. 

This  circulation  was  neither  as  simple  nor  as  quick  as 
that  of  the  bank  note  proper,  but  because  the  notes  were 
interest-bearing  they  were  readily  accepted.  In  1837-38 
the  total  issue  of  this  paper  went  beyond  60,000,000  francs  " 
It  fluctuated  afterwards,  until  1843,  between  35,000,000 
and  58,000,000  francs.  Laffitte  died  in  1844  and  was 
replaced  by  three  managers.  From  this  time  the  issue 
rose  to  80,000,000  francs.  In  1847  the  Caisse  Gen^rale 
du  Commerce  et  de  T Industrie  ceased  operations,  being 
ruined  by  the  panic.  This  was  a  natural  result,  given 
the  method  pursued  and  the  multiplicity  of  risks  incurred 
by  the  bank. 

Nevertheless,  it  had  been  useful.  In  1 837-38  the  number 
of  bills  discounted  was  220,000,  representing  a  sum  of 
more  than  276,000,000  francs.     These  figures  grew  larger 

oThe  average  circulation  was  about  15,000,000  francs. 

74 


J  ,,.: 


Evolution     of    Credit     and     Banks 

and  in  1844,  the  year  when  Laffitte  died,  the  number  of 
bills  discounted  was  476,000,  making  a  total  of  358,000,000 
francs. 

The  Comptoir  GSnSral  du  Commerce,  called  the  Caisse 
Gartner  on,  was  founded  April  17,  1843;  then  the  Caisse 
Centrale  du  Commerce  et  des  Chemins  de  fer  was  organized 
with  a  capital  of  7,500,000  francs,  under  the  management 
of  M.  Baudon.  Still  others,  the  houses  of  B^chet,  Dethomas 
&  Co.,  with  a  capital  of  15,000,000  francs,  and  Cusin, 
Legendre  &  Co.,  with  2,000,000  francs  capital,  followed  this 
movement,  etc.  All  these  banks  suspended  payments  in 
the  crisis  of  1847.  We  have  told  what  a  panic  burst  out 
in  Paris  and  the  provinces  as  a  result  of  their  sudden 
decision  to  close  their  doors. 

In  reality  these  banks,  some  of  which  negotiated 
railroad  securities,  should  not  have  made  discounts, 
received  deposits  from  merchants,  or  consented  to  open 
running  accounts;  they  had  another  mission  to  fulfil 
with  the  capital  belonging  to  them.  The  crisis  would 
scarcely  have  affected  them  at  all  if  they  had  kept  within 
the  limits  of  the  functions  for  which  they  were  intended, 
and  which  were  to  be  especially  assigned  to  them  later. 

We  have  said  above  that  the  greater  number  of  the 
Paris  bankers  had  suspended  payments  during  the  panic 
of  1848,  so  that  there  was  no  longer  any  intermediary 
between  the  Bank  of  France,  which  accepted  only  securi- 
ties with  three  names,  and  the  commercial  public.  Now, 
the  third  name  had  been  added  by  the  intermediary  banks. 
The  provisional  government,  ten  days  after  the  revolu- 
tion of  February  24  had  put  it  in  power,  hit  upon  the 
idea  of  founding  a  Comptoir  d'Escompte  in  Paris.     The 

75 


H 


K 


National      Monetary       Commission 

decree  establishing  the  Comptoir  is  dated  March  4.  This 
concern  was  to  be  called  the  Dotation  du  Petit  Commerce. 
On  March  7  a  decreee  was  passed  creating  discount  banks 
(comptoir s  d'escompte)  in  all  the  industrial  towns  of  France. 

The  basis  of  all  the  comptoirs  d*escompte  established 
in  France  in  1848-49  is  the  same.  Their  capital  was  to 
be  formed  by  the  cooperation  (i)  of  private  individuals, 
(2)  of  the  State,  (3)  of  the  municipalities;  each  to  furnish 
a  third  of  the  required  capital.  The  first  third  was  to 
be  entirely  paid  by  private  individuals  (shareholders) ;  the 
second  third,  furnished  by  the  State,  was  represented  by 
Treasury  notes;  the  completing  third  by  mimicipal  obliga- 
tions. In  addition  the  State  gave  the  greater  part  of  these 
comptoirs  a  loan  of  specie,  which  was  to  bear  interest  at 
4  per  cent.  As  a  matter  of  fact,  these  loans  were  mostly 
paid  back  by  the  end  of  three  years.  The  comptoirs  ac- 
cepted bills  on  longer  time  than  the  Bank  of  France;  they 
had  a  maximum  maturity  of  one  hundred  and  five  days;* 
the  comptoir  at  Lyons  allowed  only  forty-five  days. 

As  may  be  seen,  the  State  and  the  municipalities  fur- 
nished guaranties  by  their  securities :  Treasury  notes  and 
town  obligations;  the  State  even  loaned  funds;  and  yet 
the  State  stipulated  no  profits  either  for  itself  or  for  the 
towns.  The  profits  were  to  accrue  implicitly  and  entirely 
to  the  shareholders — a  singular  proceeding,  truly,  for  a 
popular  Government  which  had  come  into  power  for  the 
express  purpose  of  combating  the  financial  oHgarchy  of 
the  Government  of  July.    This  may  well  seem  a  paradox. 

o  This  extreme  limit,  fixed  by  the  decree  of  March  7,  was  disregarded  by 
certain  comptoirs;  the  one  at  Metz  went  so  far  as  to  accept  150-day  paper, 
and  the  one  at  Nancy  180-day  paper. 

76 


Evolution    of    Credit     and     Banks 

The  duration  of  the  Paris  Comptoir  was  limited,  it  is 
true,  to  three  years.  It  was,  according  to  the  intention 
of  the  Government,  a  transition  measure. 

The  capital  of  the  Comptoir  de  Paris — capital  paid  in 
by  shareholders — was  got  together  with  difficulty  in  the 
midst  of  the  panic.  People  bought  the  shares  as  they 
would  lottery  tickets,  and  the  first  shareholders  were 
insurance  companies,  the  association  of  notaries  and  attor- 
neys, and  charity  organizations.  Only  about  1,587,000 
francs  could  be  collected,  and  the  State  gave  a  subsidy 
of  1,000,000  in  addition  to  its  third,  making  a  little  more 
than  2,500,000. 

But  it  soon  became  necessary  to  extend  the  operations 
of  the  Comptoir  which,  according  to  its  principle,  was  to 
make  discoimts  and  collections  only.  The  crisis  was  acute 
and  there  was  a  demand  for  loans  on  collateral  also. 

By  the  decree  of  March  24  this  sort  of  loan  was  intelU- 
gently  organized.  Sous-comptoirs  de  garantie  were  insti- 
tuted. These  sous-comptoirs  loaned  on  pledges  of  mer- 
chandise, on  storehouse  warrants,  and  finally  on  certifi- 
cates and  securities.  Their  capital  was  furnished  entirely 
by  private  industry.  There  were  seven  of  these  sous- 
comptoirs  in  Paris,  as  follows:  (i)  The  Comptoir  of  the 
Book  Trade;  (2)  the  Comptoir  of  Metals;  (3)  the  Comp- 
toir of  Builders  and  Contractors;  (4)  Comptoir  of  Colonial 
Commodities;  (5)  Comptoir  of  Dry  Goods;  (6)  Comptoir 
of  Textiles;  (7)  Comptoir  of  Railroads  (founded  1850). 

Until  August  31,  1848,  these  sous-comptoirs  had  pre- 
sented to  the  Comptoir  d'Escompte  bills  valued  at  only 
a  little  more  than  58,000,000  francs. 


77 


NaHonal      Monetary       Commission 

As  for  the  Comptoir  itself,  it  had  made  the  following 
transactions  up  to  August  31 : 

Discounts  on  bills go''™'"' 

Discounts  on  warrants  for  merchandise       /:'         ^it 

Collections 6,924,166 

Rediscount  of  commercial  pape/at  "the"  Bank  oVFran^.^^^"  59!  ^9!  2^5 

In  the  provices  the  number  of  comptoirs  was  67  in  the 
beginning,  with  a  total  nominal  capital  of  130,500,000 
francs.  In  reality,  the  capital  subscribed  and  paid  was 
somewhat  more  than  25,000,000  francs.  The  State  sub- 
sidies amounted  to  a  little  over  10,000,000  francs,  giving 
an  actual  working  capital  of  35,000,000  francs. 

These  comptoirs,  with  this  limited  capital,  did  in  three 
years  the  following  business: 


Year. 

Number  of 
comptoirs. 

Total 

amount 

of  bills 

discounted 

(million 

francs). 

1848 

6s 
63 
61 

1849 

343-6 

1850 _ " "■ 

346.3 

371.8 

These  comptoirs  came  into  existence  through  special 
circumstances.  They  had  been  established  in  an  abnor- 
mal way,  with  particular  advantages.  These  advantages 
were  destined  to  disappear  together  with  the  needs  which 
had  caused  them  to  be  granted.  In  June,  1853,  a  decree 
brought  the  comptoirs  under  the  common  law.  Twelve 
of  them  in  the  provinces  were  reorganized  either  as  joint- 
stock  or  as  limited  liabiUty  companies  (sous  forme  de 
commandite).  The  Comptoir  d'Escompte  of  Paris  was 
reorganized  in  1854.    We  shall  study  it  later.    It  is,  in 

7« 


V 


Evolution     of    Credit     and     Banks 

fact,  through  the  development  and  various  phases  of 
this  institution  that  we  shall  follow  the  evolution  of  credit 
in  France. 

It  was  to  the  provisional  government  of  1848  that  was 
due  the  establishing  of  general  warehouses  in  Paris  and  the 
principal  cities  of  France.  (Resolution  of  March  26,  1848, 
confirmed  by  the  decree  of  August  23,  following.)  For 
the  first  time  the  French  Government  took  measures 
relating  to  those  institutions  which  were  to  make  easier 
in  the  future  collateral  loans,  by  means  of  warrants  or 
receipts  of  goods  in  storage.  This  was  a  measure  fertile 
in  advantages  for  the  commercial  credit  of  France. 


79 


m 


! 


< 


I 


Part  II. 

THE  BANK  OF  FRANCE— THE  CREDIT  MOBILIER^ 
THE  FIRST  COMPTOIR  D'ESCOMPTE,  1848-1875. 

INTRODUCTORY. 

We  now  enter  upon  a  new  phase  of  credit  in  France. 
Industrial  progress,  especially  that  in  railroad  construc- 
tion; the  extension  of  commerce,  in  spite  of  political 
events;  the  future  so  full  of  promise  from  the  economic 
point  of  view,  thanks  to  new  discoveries;  the  ease  with 
which  capital  has  already  been  collected  for  railroad  con- 
struction; the  fact  of  the  existence  of  a  single  bank  of 
issue  which  recommends  itself  to  the  majority  of  people  of 
the  period;  the  trend  of  pubHc  opinion  toward  industrial 
and  commercial  enterprises  under  the  impulse  of  certain 
new  theories,  especially  the  doctrines  derived  from  St. 
Simon;  the  attainment  of  universal  suffrage,  which,  it 
was  believed,  would  be  the  end  of  all  revolutions;  this 
sum  of  financial,  economic,  and  political  events  created 
a  new  atmosphere,  a  new  environment. 

The  Bank  of  France  continued  its  rdle  as  a  bank  of 
issue  in  a  prudent  enough  manner;  it  fortunately  con- 
tinued to  be  much  more  a  bankers'  bank  than  a  state 
bank,  although  it  had  frequent  relations  with  the  State 
and  rendered  it  real  services.  In  spite  of  its  being  on  a 
smaller  scale  and  having  much  less  importance  than  it 
was  to  have  later  (i.  e.,  a  few  years  after  1870,  when  credit 

1971 — 10 6  81 


N  ational      Monetary       Commission 

societies  are  widening  their  scope),  it  was  already  the 
center  of  reHef  in  case  of  panic,  and  the  support  on  which 
rested  the  whole  system  of  French  credit.  Circumstances 
made  it  thus,  without  any  preconceived  theory;  and  it 
turned  out  to  be  the  point  of  departure  for  the  present 
organization  of  credit  in  France.  You  might  conceive  of 
another  organization  perhaps  better;  this  one  is  the  result 
of  the  historical  evolution  which  we  are  trying  to  set  forth. 
Furthermore,  during  this  period,  between  1848  and  1870, 
the  Bank  of  France  did  not  deviate  too  far  from  its  fun- 
damental attributes  as  a  bank  of  discount.  Although  it 
allows  collateral  loans,  which  began  to  increase  very  per- 
ceptibly from  1852  on,  it  did  not  enter  into  the  danger- 
ous path  of  either  the  direct  or  indirect  commandite  of 
industries.  Hence  came  as  its  reward  in  1867  the  re- 
newal of  its  privilege  almost  up  to  the  end  of  the  century 
(end  of  December,  1897). 

But  in  this  function  which  it  ought  not  to  fulfil,  which 
it  does  not  fulfil,  of  entering  as  a  silent  partner  into 
industries  or  of  favoring  their  creation,  other  institutions 
are  going  to  take  its  place.  These  will  not  undertake,  as 
did  Laffitte  or  Ganneron  or  certain  others  (whose  attempts 
and  relative  success  we  have  already  seen),  to  practice 
all  kinds  of  banking  operations  together — discount,  col- 
lections, silent  partnerships,  etc. ;  but  they  will  involve 
themselves  in  speculation  without  preliminary  study, 
without  taking  into  account  the  true  vital  conditions, 
which  banks  of  this  kind  should  conform  to  in  order  to 
live.  So  v:e  are  going  to  witness  the  collapse  of  the  bank 
which  sums  up  their  aspirations  and  faults:  the  Credit 
Mohilier. 

82 


Chapter  I. — The  Bank  of  France  the  sole  hank  of  issue — Its 
operations  with  the  State — The  founding  of  institutions 
called  '^  Haute  Banque'' — Industrial  loans  and  specula- 
tion— The  Credit  Mohilier  and  the  Pereires. 

Liquidation  of  the  panic  of  1848.— Tlie  credit  of  the  Banlc's  notes.— Renewal  of  the 
privilege  of  the  Bank  up  to  1867.— Widening  out  of  the  list  of  securities  admissible 
as  collateral  on  loans.— The  Bank  widens  the  scope  of  its  operations.— Changes  in 
the  rate  of  discount.— Revival  of  business  under  the  influence  of  four  reasons. — 
The  Crimean  war  interrupts  this  boom,  1855.  Rise  in  the  discount  rate.— The 
right  remedy.— A  wise  measure.— Buying  of  specie  by  the  Bank,  1855-1856.— Re- 
newal of  the  charter  of  the  Bank  of  France  (law  of  June  9, 1857).  New  conditions.— 
Increase  of  capital.— Loan  to  the  State.— Fifty-franc  notes.— The  result  of  small 
bank  notes.— The  Bank's  freedom  in  regard  to  discount  rate.— Establishment  of 
branch  banks.— The  great  panic  of  1857.— Measures  taken  by  the  Bank.— Dis- 
count rate  proportioned  to  the  length  of  terms  of  payment.— Reaction  after  the 
panic— Operation  called  "high  finance."— Loans  on  securities  previous  to  sale. — 
Ample  credit  of  France  at  this  time.— The  creation  of  capital  by  saving.— Character- 
istic facts  regarding  the  elements  of  French  finance.— Number  of  issues  of  rail- 
road bonds  sold  by  the  Bank.— Dangers  of  such  precedents. 

After  the  great  crisis  of  1848,  which  was  above  all, 
a  political  crisis — although  the  political  situation  still 
gave  some  cause  for  alarm — public  opinion,  on  top  of  this 
rough  shaking  up,  as  often  happens  under  similar  condi- 
tions, looked  on  the  future  with  greater  confidence. 
When  order  was  reestablished  after  the  days  of  June,  a 
reaction  set  in.  There  was  indeed  a  panic  in  185 1  at  the 
time  of  the  coup  d'etat,  but  it  was  not,  as  in  1848,  a  sud- 
den and  unexpected  change.  The  event,  besides,  had 
been  discounted  by  the  business  world. 

Meanwhile,  business  was  slack  in  consequence  of  the 
panic  which  had  followed  the  economic  crisis  of  1847. 
The  Bank  was  anxious  to  carry  on  business,  and  all  the 
more  because  its  capital,  on  account  of  its  absorption  of 


83 


National     Monetary      Commission 

the  departmental  banks,  had  increased  from  67,900,000 
francs  to  93,250,000  francs.  Because  of  this,  too,  its  max- 
imum Hmit  of  circulation,  which  was  350,000,000  francs, 
was  raised  to  452,000,000  francs.  It  liquidated  its  dis- 
honored bills  rather  successfully. 

During  the  year  1848  it  lent  rather  large  sums  to  the 
State,  directly  by  opening  subscriptions  for  the  loan,  like- 
wise to  the  cities  of  Paris  and  Marseilles,  to  the  Department 
of  the  Seine,  to  the  hospitals  and  asylums  of  Paris  and  of 
Lyons.     Here  are  the  figures: 

Mar.  31:  Lent  to  the  State  without  interest  on  treasury  cer-  Francs. 

tificates 50,000,000 

May    5 :  Lent  to  the  Bank  of  Deposits  and  Consignments  on 

transfer  of  government  securities 3°.  000,  000 

June    3:  Opening  to  the  State  of  a  credit  of  150,000,000  of 

which  the  State  took :.-- -  50.000,000 

July  24:  Subscription  to  the  state  loan - 22,000,000 

Lent  to  the  city  of  Paris,  to  Lyons,  to  the  Depart- 
ment of  the  Seine,  etc 20,000,000 

Finally,  the  Bank  going  beyond  its  usual  functions, 
had  lent  to  different  metal  works  about  34,000,000  francs 
on  mortgages  in  order  to  enable  them  to  execute  the  orders 
given  them  by  the  railroad  companies.  For  all  these 
operations,  the  Bank  issued  a  much  larger  number  of 
notes,  especially  in  200  and  100  franc  denominations. 
Soon  commercial  discounts  worked  easier  in  private  banks, 
and  calm  succeeded  this  storm  in  which  panic — an  evil 
cotmselor  in  this  special  case— had  been  the  chief  cause  of 

the  trouble. 

To  sum  up,  the  Bank  of  France  managed  very  skilfully 
in  this  difficult  time,  and  was  able  to  clear  up  this  situa- 
tion most  honorably.  Its  notes  suffered  no  deprecia- 
tion during  these  disastrous  months. 

84 


<      I 


Evolution     of    Credit     and     Banks 

It  may  be  said  that  on  this  occasion  the  notes  of  the 
Bank  went  through  the  test  of  fire,  and  so  from  that 
moment  forth  they  enjoyed  unquestioned  credit;  and  to 
such  a  degree  that  when  quiet  was  restored,  and  when 
coin  minted  in  large  quantity  that  year  was  very  plentiful 
and  the  Bank's  reserve  was  very  high,  the  public  preferred 
the  notes — although  they  had  forced  currency — to  specie, 
and  that  toward  the  end  of  1848.  This  explains  why  a 
law  authorized  an  increase  in  the  amount  of  issue  from 
452,000,000  to  525,000,000  francs.  The  Bank,  besides, 
had  very  skilfully  resumed  specie  payment  as  soon  as  it 
could  at  the  end  of  1848.  Forced  currency  was  sup- 
pressed by  law  on  August  6,  1850. 

The  following  years  can  scarcely  be  said  to  have  any 
history. 

Here  are  the  average  figures  relating  to  reserves,  issues, 
and  the  figures  relating  to  the  total  discounts  during  the 
years  from  1849  to  1853: 

[Million  francs.] 


Year. 


1849 

1850 
1851 
1852 
1853 


Reserve 
(average). 


350.4 
457.8 
596.6 
584.8 
452.8 


Notes  in 
circulation 
(average). 


421.7 
485.6 

530.3 
621.  a 
659.8 


Total 
discounts 
(average). 


1,028.3 
1, 171. 1 
1.247-4 
1.840. 1 
2.854.  a 


The  average  reserve,  therefore,  increased  from  1849  to 
1852,  then  it  decreased,  and  we  have  to  wait  until  1859  for 
it  to  reach  570,000,000  francs.  As  to  issue,  it  had  a  general 
tendency  to  increase  without  much  fluctuation.  The 
average  of  notes  issued  in  1851  was  less  than  the  reserve. 

85 


N  ational      Monetary       Commission 

At  one  time  in  that  year,  October  2,  the  reserve 
reached  626,000,000  francs,  and  for  a  few  days  it  exceeded 
the  circulation  by  110,000,000  francs. 

On  March  3,  1852,  a  decree  renewed  the  charter  of  the 
Bank  up  to  1867,  and  this  same  decree  authorized  it  to 
make  loans  on  the  shares  and  bonds  of  French  railroads. 
A  few  days  after,  the  decree  of  March  22  gave  it  the  same 
authorization  for  the  bonds  of  the  city  of  Paris. 

That  was  necessary,  for  the  Bank  needed  to  extend  its 
operations  in  order  to  utilize  its  power  of  issue.  Besides, 
it  had  a  large  reserve;  indeed,  the  average  reached  in  1852 
nearly  585,000,000  francs.  Furthermore,  railroad  securi- 
ties had  become  widely  distributed  in  the  hands  of  the 
public. 

The  Bank,  or  at  least  its  directors,  understood  that 
new  times  require  new  methods.  They  changed  the  rate 
of  discount,  which  had  remained  fixed  for  thirty  years, 
except  in  1848,  when  it  was  raised  to  5  per  cent.  They 
lowered  it  for  a  certain  time  in  1852  and  in  1853  to  3  per 
cent.  They  made  it  vary  oftener,  according  to  the  needs 
of  the  money  market,  and  they  showed  themselves  alive 
to  the  real  spirit  of  banking.  But  they  became  really 
free  in  their  movements  in  this  matter  only  when,  as  a 
result  of  the  law  of  June  9,  1857,  there  disappeared,  as 
far  as  the  Bank  was  concerned,  the  absurd  limitations  on 
the  rate  of  interest  fixed  by  the  laws  against  usury. 

Business  picked  up  at  this  time  for  several  reasons:  (i) 
Because,  the  form  of  government  in  France  being  defi- 
nitely settled  since  1852,  public  opinion  was  reassured; 

(2)  because  the  Bank  of  France  had  made  the  conduct  of 


4i 


W'd^ ; 


Evolution     of    Credit     and     Banks 

its  affairs  more  flexible;  (3)  because  at  that  time  two  in- 
stitutions were  founded  destined  to  give  a  stimulus  to 
business — the  Credit  Mobilier,  which  we  are  going  to  take 
up,  and  the  Credit  Fonder,  the  development  of  which  we 
shall  examine  in  another  section  of  this  work;  (4)  finally, 
because  the  Comptoir  d'Escompte  de  Paris,  which  was 
destined  to  be  merely  provisional,  because  it  was  founded 
during  the  crisis  of  1848  to  take  the  place  of  the  banks 
whose  failures  had  left  such  a  great  void,  now  gradually 
freed  itself  from  state  control,  rendered  real  services  to  the 
middle-sized  and  small  trade,  and  became  an  important 
banking  house,  devoting  itself  especially  to  so-called  com- 
mercial operations.  It  is  important,  furthermore,  to  keep 
in  mind  a  cause  that  had  been  active  for  the  past  twelve 
years — the  extension  of  railroads.  At  that  time,  in  1853, 
more  than  4,000  kilometers  of  railroads  were  in  operation, 
supplied  with  more  than  1,200  locomotives.  Now,  these 
railroads  were  destined  to  double  in  seven  or  eight  years. 
It  seemed  as  if  business  would  go  on  growing  in  this 
way,  when  the  Crimean  war  broke  out.  This  war  necessi- 
tated large  loans,  which  rose  to  about  1,540,000,000  francs. 
That  diminished  capital  on  which  industry  and  commerce 
were  making  urgent  demands.  The  Bank  raised  the  dis- 
count rate  to  5  per  cent,  then  to  6  per  cent.  Its  reserve 
fell  in  November  to  211,000,000  francs,  while  its  discounts 
were  in  October  480,000,000  francs — that  is  to  say,  double 
what  they  had  been  at  the  same  time  in  1854.  'The  Bank 
then  lowered  to  seventy-five  days  the  limit  for  payment 
of  the  bills  it  discounted.  In  1856  it  extended  the  limit 
to  ninety  days  and  lowered  the  discount  rate  to  5  per 


«7 


II 


National      Monetary       Co 


mmtsston 


cent ;  but  these  measures  were  not  kept  up  in  the  face  of 
the  events  that  followed. 

Matters  were  hastening  to  a  climax.  Precious  metals 
became  more  and  more  scarce.  In  November,  1856,  the 
reserve  fell  to  164,000,000  francs,  and  discounts  rose  to 
520,000,000  francs.  The  cause  was  the  war,  which  in  pay 
and  food  for  the  army  had  absorbed  specie  estimated  at 
about  800,000,000  francs.  Adding  to  this  other  causes  for 
the  exodus  of  capital,  we  find  that  at  least  1,000,000,000 
francs  went  out  of  the  country. 

Was  the  remedy  to  raise  the  rate  of  discount  and 
shorten  the  time  of  maturity  on  bills?  To  a  certain 
extent,  yes.  But  as  in  this  case  a  sudden  export  of 
about  a  third  of  our  metallic  stock  had  taken  place,  the 
Bank  should  have  turned  its  attention  to  getting  back  this 
lost  stock.  And  it  did.  It  bought  254,500,000  francs 
in  specie,  which  cost  it,  with  the  premium  and  transporta- 
tion, iK  per  cent.  This  happened  in  1855.  In  1856  it 
imported  560,000,000  in  specie,  which  cost  it  i>^  per 
cent. 

It  was  easy  to  foresee  that  the  privilege  of  the  Bank 
of  France  would  be  renewed.  It  was  to  expire  in  1867, 
and  the  law  of  June  9,  1857,  prolonged  this  privilege 
to  December  31,  1897.  This  law  doubled  the  Bank's 
capital  by  the  issue  of  91,250  new  shares,  which 
were  assigned  to  the  holders  of  the  old  shares.  This 
doubling  of  the  capital,  which  had  become  too  small  for 
the  Bank's  increasing  business,  was  a  safeguard.  The 
capital  then  reached  182,500,000  francs. 


88 


^ 


Evolution    of     Credit     and     Banks 

But  out  of  the  increased  capital,  100,000,000  francs  dur- 
ing the  year  1857  had  to  be  turned  into  the  public  treasury, 
which  gave  the  Bank  in  return  government  3  per  cents 
at  the  very  high  price  of  75  francs.  The  State  made  a 
good  thing  by  it.  In  reality  these  100,000,000  francs  were 
used  to  diminish  the  debit  balances  of  the  Treasury  and 
helped  reduce  the  figure  (which  was  very  high,  as  it  hap- 
pened) of  the  floating  debt. 

The  Bank  was  authorized  to  issue  50-franc  notes.  An 
excellent  innovation  in  principle,  but  the  Bank  only  used 
this  privilege  in  1864,  seven  years  later.  Now,  in  times 
of  panic  this  kind  of  notes,  like  those  of  100  francs,  econo- 
mizes coin  in  current  transactions;  and  in  prosperous 
times,  as  they  are  easier  to  handle  than  specie,  these  small 
bills  tend  to  replace  specie  in  circulation  and  force  it 
back  into  the  coffers  of  the  bank  of  issue.  Scotch  banks 
which  have  issued  and  are  still  issuing  notes  for  one 
pound  sterling  have  seen  all  the  metallic  money  of  the 
country  flow  into  their  coffers. 

This  law  of  June  9,  1857,  gave  the  Bank  the  right  of 
raising  the  interest  rate  as  much  as  it  judged  necessary, 
whereas  before  it  could  not  exceed  6  per  cent.  It  took 
advantage  of  this  liberty  soon  after.  But  the  Bank  of 
France  alone  had  this  advantage  by  law;  other  banks 
were  not  authorized  to  do  likewise.  It  is  true  they  went 
beyond  their  right  without  being  disturbed. 

Finally,  ten  years  after  the  law  of  1857,  the  Bank  could 
be  compelled  to  establish  branches  in  the  departments 
where  they  did  not  exist.     The  Bank  was  in  no  hurry  to 


89 


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National      Monetary       Co 


mmtsston 


found  these  branches.     In  1867,  although  ten  years  after 
the  law,  25  departments  were  still  improvided  for. 

The  panic  of  1857  began  in  the  United  States.  We 
shall  not  enter  into  the  details  of  its  origin  and  develop- 
ment, but  content  ourselves  with  merely  indicating  two 
of  its  causes — one  has  to  do  with  our  subject,  the  other 
with  the  commercial  relations  of  North  America  and 
Europe  in  1857. 

The  first  of  these  causes  is  that  many  American  bankers 
had  advanced  money,  made  loans  to  industries,  especially 
to  railroads,  out  of  their  deposits.  They  had  thus  tied 
up  capital,  and  when  the  panic  came  they  did  not 
have  the  free  funds  that  they  would  have  had  if  they 
had  used  their  capital  in  short-term  business,  such  as 
commercial  discount.  The  truth  is  there  was  over- 
speculation. 

The  second  of  these  causes— for  panics,  especially  large 
ones,  always  have  several  causes— was  that  Europe  in 
1857,  thanks  to  an  excellent  harvest,  did  not  buy  grain 
of  America.  So  the  United  States  did  not  export  any  to 
the  Old  World.  Hence  the  rate  of  exchange  was  unfavor- 
able to  America,  and  the  United  States  was  obliged  to 
send  specie  over  to  pay  for  its  importations,  from  Lon- 
don, Germany,  etc. 

The  panic  was  terrible  in  September.  Its  reaction  was 
felt  most  of  all  in  England,  then  in  Germany,  and  to 
some  small  extent  in  France.  In  this  latter  country 
especially  people  felt  the  hard  times,  which  affected 
London  and  the  principal  business  centers  of  northern 
Germany. 


90 


\ 


Evolution     of    Credit     and     Banks 

Now  we  have  to  concern  ourselves  here  only  with  what 
happened  in  France  and  with  what  the  Bank  did  to  meet 
the  crisis. 

The  Bank  of  France  took  the  standard  method ;  it  raised 
the  discount  rate.  At  the  beginning  of  October  it  raised 
the  rate  to  6  per  cent;  on  October  13  it  raised  it  to  6.5 
per  cent;  on  October  21  it  raised  it  to  7.5  per  cent;  finally, 
on  November  1 1,  it  was  fixed  at  10  per  cent. 

The  Bank  of  England  had  reached  that  figure  on 
November  10.  The  Bank  of  France  devised  a  rather 
ingenious  plan.  It  made  a  scale  of  three  rates  i  per  cent 
apart,  in  proportion  to  the  time  to  run  until  maturity, 
and  it  continued  to  apply  this  system  until  December  20. 
It  did  not  try  by  other  means  to  diminish  discounts,  and 
from  the  very  start  it  calculated  what  the  extent  and 
the  duration  of  the  crisis  in  France  would  be.  So,  as 
early  as  December  21,  it  returned  to  the  6  per  cent  rate 
established  at  the  beginning  of  October. 

As  usually  happens  in  like  cases,  there  was  much 
unemployed  capital  after  the  panic — business  was  slack. 
In  1858  the  average  reserve  in  the  Bank  rose  to 
460,000,000  francs,  a  figure  which  had  not  been  reached 
since  1853.  ^'^  1859  and  i860  the  same  thing  was  true, 
as  appears  from  the  fact  that  the  average  figure  of  the 
reserve  went  up  to  570,000,000  francs  in  1859  and  in  i860 
to  513,500,000  francs;  the  average  balances  due  to  individ- 
uals on  running  accounts,  which  before  had  been  fluctuat- 
ing around  150,000,000  francs,  rose,  during  these  two  years, 
to  237,000,000  and  209,000,000  francs,  respectively,  a  sign 
of  business  depression.    The  same  phenomenon  may  be 


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mmtssion 


observed  on  the  eve  of  crises.  Capitalists,  witnessing 
great  speculations  and  large  business  enterprises  and  fore- 
seeing a  setback,  keep  their  capital  in  reserve.  This  takes 
place  especially  in  France. 

the;  bank  of  FRANCE  DISPOSES  OF  SECURITIES  (1858-1861). 

Up  to  this  time  we  have  seen  the  Bank  for  the  most 
part  occupied  only  in  commercial  banking— discount,  loans 
on  conservative  securities,  transfers,  and  of  course  the 
issue  of  bank  notes.  When  it  has  engaged  in  making 
advances  or  loans  which  did  not  really  enter  into  the 
business  of  commercial  banks,  it  has  been  because  it  was 
dealing  with  the  State,  to  which  it  owed  its  charter.  But 
at  the  time  we  have  now  reached  the  great  railroad 
enterprises  had  got  well  under  way ;  they  saw  how  bright 
their  prospects  were  for  the  future.  So  they  began  looking 
around  for  capital  to  extend  the  half-finished  systems, 
to  finish  the  important  lines,  to  better  their  equipment 

and  organization.     This  very  busy  period  in  France 

which  was  busy,  too,  in  other  countries — extended  from 
the  revolution  of  1848,  or  rather  from  the  election  of 
Prince  Napoleon  as  President  of  the  Republic,  almost  to 
the  end  of  the  Empire. 

There  was  no  lack  of  capital  for  railroad  undertakings  in 
France  at  this  time.  France,  which  has  been  called  the 
land  of  the  "woolen  stocking, "«  because  of  its  character- 
istic thrift,  could  easily  furnish  all  the  resources  needed  for 
railroad  construction  and  operation.  However,  the  com- 
panies did  not  then,  as  now,  call  upon  the  public  directly; 

oThis  expression  comes  from  the  use  made  of  woolen  stockings  as  purses 
for  hoarding  money  in  the  country. 


Evolution     of    Credit     and     Banks 

and  they  did  not  sell  bonds  at  all  their  ticket  offices.  They 
had  recourse  to  intermediaries.  For  five  years  past  the 
Socidt^  G^n^rale  du  Credit  Mobilier  (founded  in  1853  by 
the  Pereire  Brothers  and  which  we  shall  discuss  later) 
had  already  been  undertaking  operations  in  "high 
finance" — marketing  of  securities,  silent  partnerships 
in  industrial  companies  etc.  Was  it  the  example  of 
this  company  which  induced  the  Bank  of  France  at  that 
time  to  follow  the  same  course?  It  is  rather  difficult  to 
say.  It  really  issued  securities  in  1858,  either  in  its  cen- 
tral establishment  in  Paris  or  in  its  branch  banks.  And  it 
did  not  do  so  cautiously  in  its  capacity  as  simple  inter- 
mediary, contenting  itself  with  being  only  an  interme- 
diary, selling  on  commission;  it  advanced  before  any  sale  a 
rather  large  sum  on  the  obligations  it  was  to  dispose  of. 
This  advance  amounted  to  100,000,000  francs  at  a  time 
when  the  proceeds  of  the  marketing  of  bonds  of  eight 
companies — the  Mediterranean,  Dauphine,  Midi,  Geneva, 
Orleans,  West,  East,  and  Ardennes — were  to  amount  to 
about  246,000,000  francs. 

In  1858  it  sold  in  this  way  617,766  bonds  at  an  average 
price  of  276.60  francs.  It  had  left  272,769  bonds,  which 
it  disposed  of  by  subscription  and  with  great  success. 
They  rose  in  Paris  to  562,298  and  in  the  provinces  to 
424,589,  making  a  total  of  986,887. 

The  price  of  issue  was  274.50  francs.  During  the 
remainder  of  the  year  1853  the  Bank  adopted  the  method 
of  selling  which  it  had  used  at  first  and  began  to  sell  a 
great  many  bonds  over  its  own  counters  and  those  of 
its  branches;  but  the  price  of  these  bonds  had  gone  up 
more  than  10  or  12  francs. 

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N  ational      Monetary       Commission 


Evolution     of    Credit     and     Banks 


It  disposed  in  this  way  of  881,952  bonds  for  287.50 
and  288.75  francs. 

New  sales,  this  time  by  subscription,  were  made  in  i860 
and  1 86 1.  This  method  facihtated  the  sale  and  the  rise 
in  price  of  the  bonds.  One  can  estimate  from  what  then 
happened  France's  power  to  save  and  accumulate  capital. 
Thus  in  i860  the  Bank  offered  to  subscribers  a  much 
larger  number  of  bonds  than  formerly,  no  less  than 
1,023,000.     The  subscription  rose  to  1,627,817  bonds. 

They  were  issued  at  the  price  of  292.75  francs.  In 
1861  there  was  a  new  offer  by  subscription  of  786,000 
bonds.  The  pubHc  rushed  in;  the  issue  was  subscribed 
for  almost  four  times  over.  More  precisely,  bids  were 
sent  in  for  2,972,449  bonds. 

These  facts  show  what  are  the  elements  at  the  basis  of 
French  credit  to-day,  and  how,  by  the  very  nature  of 
things,  France  has  been  led  to  adopt  it. 

Indeed,  not  only  did  large  capitalists  take  up  these 
bond  issues,  but  the  mass  of  middle-sized  savers.  And 
it  is  because  of  these  middle-sized  and,  later,  small  savers, 
who  create  and  supply  the  great  bulk  of  capital  in  this 
country,  that  the  institutions  of  credit  have  been  obliged 
to  regulate  their  progress  in  a  conservative  way,  because 
their  depositors  and  a  large  number  of  their  clients  have 
themselves  the  inborn  prudence  of  all  those  who,  pos- 
sessing only  a  little  capital,  do  not  wish  to  run  any  risks 
with  it. 

At  any  rate,  during  these  four  years  the  Bank  of  France 
invested  in  this  way  for  the  benefit  of  the  eight  companies 
which  we  have  mentioned  an  actual,  fully  paid  cash 
capital  of  more  than  1,200,000,000  francs. 


\ 


This  sum,  a  large  one  at  that  period,  did  not  bring 
about  a  lower  price  for  the  bonds.  The  pubHc  had  from 
that  time  forth  a  field  for  its  investments.  The  Bank  of 
France  reaUzed  splendid  profits  in  these  operations. 
People  have  asked  if  it  ought  to  have  done  so,  if  it  con- 
formed to  its  statutes  in  thus  engaging  in  the  business 
of  marketing  securities.  There  were,  even  among  its 
directors,  men  who  criticised,  while  excusing,  these 
operations  in  high  finance.  In  order  to  explain  the 
conduct  of  the  Bank  of  France  at  this  time,  people  have 
said  that  the  circumstances  were  exceptional;  then  the 
convention  of  1859  with  the  raihoad  companies  had 
given  them  the  special  help  and  warrant  of  the  State. 
The  Bank  was  on  too  good  terms  with  the  Government 
not  to  allow  itself  to  indulge  in  operations  which  were 
unusual,  but  profitable,  to  it.  Nevertheless  it  is  best  not 
to  let  a  bank  of  issue  create  a  precedent  of  this  sort;  for 
taking  its  point  of  departure  in  this  first  evasion  of  its 
statutes,  it  might  later  give  itself  up  to  operations  of  that 
kind,  dangerous  and  uncertain  to  the  last  degree  for  a 
bank  of  issue. 


94 


95 


Ml 


Chapter  II. — The  Societe  Generate  du  Credit  Mohilier  and 

the  Pereires  {i8 53-1866) . 

St.  Simon's  teaching.  Its  influence  on  developing  business  in  France.— The 
Pereire  brothers.  The  part  they  took  in  creating  the  French  railroad  systems.— 
Creation  of  the  Credit  Mobilier  1852.  Its  right  to  issue  bonds.  Useless  restric- 
tions. No  censorship.— Aim  of  the  Cr6dit  Mobilier.  Its  contemplated  scheme.— 
The  principle  of  action  of  an  investment  and  speculative  bank.— What  the  Credit 
Mobilier  did  during  its  first  years.  Services  rendered.  Its  aid  in  railroad  con- 
struction.—Large  profits.-  Difficulties  caused  by  an  enormous  dividend.— Decline 
after  1855.— Grandiose  and  dangerous  ideas  of  its  founders.— The  plan  of  issuing 
a  single  type  of  bonds.— Uncertain  guaranties  of  the  issues.— Spread  of  the  system 
to  foreign  countries.— No  relations  between  the  issues  of  bank  notes  and  the  issues 
of  credit  mobilier  bonds.— Note  on  the  institution  of  M.  Mirfts.— Trial  of  strength 
against  the  Credit  Mobilier.— The  Soci6t6  G€n6rale  pour  favoriser  le  d6veloppe- 
ment  du  Commerce  et  de  I'lndustrie  en  France. 

The  year  1852  was  a  remarkable  one  in  the  development 
of  a  credit  organization  in  France  because  of  the  found- 
ing of  two  dissimilar  institutions,  each  answering  to  dis- 
tinct needs :  the  Credit  Fancier — ^which  made  a  specialty  of 
giving  credit  on  mortgages — and  the  Societe  Generate  du 
Credit  Mobilier  Frangais. 

This  latter  institution  of  credit  was  founded  by  Emile 
and  Isaac  Pereire.  They  were  brothers  from  Bordeaux 
and  came  when  quite  young  to  Paris.  The  elder  was  a 
stockbroker  at  first,  the  other  an  accountant  in  a  bank. 
Isaac  got  acquainted  with  St.  Simon,  the  famous  head  of 
the  school  to  which  has  been  given  his  name,  and  was  a  dis- 
ciple of  the  master.  He  influenced  his  brother  Emile  who, 
in  1830,  went  into  the  offices  of  the  Globe,  a  newspaper  of 
St.  Simon's.  In  1831  both  brothers  went  over  to  the 
National,  and  soon  separated  from  St.  Simon.  But  from 
their  connection  with  him  they  imbibed  the  general  ideas 
of  his  school  regarding  the  future  and  development  of 
industries. 

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Evolution     of    Credit     and     Banks 

The  ideas  on  an  industrial  civilization  destined  to  take 
the  place  of  warlike  and  priestly  civilization  opened  up 
new  paths  to  many  thoughtful  young  men.     Many  of 
them  gave  up  the  theoretic  and  in  some  sort  religious  side 
of  St.  Simon's  teachings  to  enter  into  business.     Most  of 
them  were  successful.     They  went  especially  into  the  new 
industry  of  railroading.     One  of  them,  Talabot,  succeeded 
another  St.  Simonian  named  Enfantin,  as  director  of  the 
Paris-Lyons-Mediterranean   Company.     The   first   enter- 
prise undertaken  by  the  Pereire   brothers  was  the  rail- 
road from  Paris  to  St.  Germain,  begun  in   1833.     The 
capital  of  5,000,000  francs  was  furnished  by  the  houses 
of  Rothschild,  d'Eichthal,  Davillier,  etc.     Later  the  two 
brothers    started   the    Northern    Railroad.     Soon   after 
Emile  Pereire  became  manager  of  the  Paris-Lyons  Rail- 
road.    He    obtained   the   concession   for    the    railroads 
of  the  south,  together  with  the  canal  parallel  with  the 
Garonne  River.     In,  brief,  the  Pereire  brothers  played  a 
very  important  part  in  the  creation  of  French  raikoads. 
But  their  most   famous    achievement  was  the  Credit 
Mohilier  FranQais,  whose  firm  name  was  Societe  Generate 
du  Credit  Mohilier  FranQais.     Since  that  time  it  has  been 
called  simply  Credit  Mobilier. 

The  Credit  Mobilier  was  founded  with  a  capital  of 
60,000,000  francs,  divided  into  shares  of  500  francs  each. 
The  charter  of  its  foundation  is  dated  November  18,  1852. 
The  subscription  for  shares  was  made  by  series  of  400,000. 
The  first  subscription  gave  the  right  to  the  second,  share 
for  share;  in  the  third  subscription  the  subscribers  to  the 
first  two  series  benefited  in  the  proportion  of  one  new 
share  for  two  old  ones;  these  two  old  shares  could  belong 
1971— 10 7  97 


N  ational      Monetary      Commission 

either  to  the  first  or  second  series  or  to  both.     This  scheme 
was  not  a  new  one,  having  been  used  by  Law. 

This  society  had  obtained  the  right  to  create  obUgations 
for  a  sum  equal  to  ten  times  its  capital,  namely,  for 
600,000,000  francs.  Only  one  restriction  was  imposed, 
and  that,  moreover,  a  rather  hard  one  to  enforce.  The 
society  was  not  allowed  to  have  in  its  liabiHties  a  total 
sum  of  more  than  120,000,000  francs,  that  is,  double  its 
capital,  in  the  form  of  deposits  in  current  accounts  and 
of  obligations  payable  in  less  than  a  year.  An  important 
fact  to  note  is  that  no  ''coimcil  of  censorship"  was 
created  for  this  joint  stock  company.  There  was  no 
general  supervision.  Why  ?  Perhaps  they  had  purposely 
forgotten  this  machinery,  which  might  have  been  con- 
sidered as  an  awkward  check,  if  it  really  worked,  and 
as  a  useless  device  if  it  merely  registered  tamely  the 
wishes  of  the  board  of  directors.  Now,  in  a  joint  stock 
company,  supervision  is  indispensable  and  it  must  be 
exercised  as  far  as  possible  by  independent  men,  without 
hindering  the  progress  of  the  company.  What,  then,  did 
the  founders  of  this  new  institution  of  credit  aim  at?  Its 
principal  founder,  Isaac  Pereire,  defined  its  object  thus: 
The  CrMit  Mobilier  is  at  one  and  the  same  time  (i)  a 
society  engaging  in  commandites ;  (2)  a  financial  society; 
(3)  an  investment  bank  for  lending  and  borrowing;  (4)  a 
bank  of  issue. 

As  a  society  engaging  in  commandites  it  had  to  put  its 
resources  and  its  credit  at  the  disposal  of  important  indus- 
tries and  use  them  to  promote  large  enterprises  which  it 
backed  and  helped  to  direct. 


98 


>  W^ 


Evolution     of    Credit     and     Banks 

As  an  investment  bank  for  lending  and  borrowing,  it 
had  to  negotiate  loans  and  investments,  whether  in  regard 
to  public  credit  or  industrial  credit;  it  made  its  interven- 
tion felt  whether  by  opening  subscriptions  for  loans  or  by 
lending  directly,  or  else  by  marketing  the  obligations  of 
different  companies,  or  by  operations  on  the  Bourse: 
"Carry-overs,"  purchases,  sales,  etc. 

As  bank  of  issue,  it  had  to  issue  its  own  obligations 
representing  securities  of  every  kind:  state  funds,  bonds 
of  industrial  companies,  etc.,  in  which  it  was  authorized 
to  trade. 

It  was  a  delicate  matter  to  undertake  these  operations. 
Speculation  is  useful,  and  banks  of  this  sort  are  indispen- 
sable in  the  modern  credit  organization  of  a  country.  But 
it  is  of  great  importance  for  these  operations  to  be  carried 
on  with  the  private  capital  of  the  bank  that  undertakes 
them.  To  issue  bonds  representing  securities  in  the  bank's 
possession  is  to  call  upon  the  general  public  to  put 
money  into  enterprises  difficult  to  learn  about  and  judge 
wisely.  Such  capital  is  the  vanguard  in  industrial  enter- 
prises and  it  runs  great  risks.  It  is  true  that  because  of 
these  risks  it  makes  large  profits  possible.  Then,  too,  this  ^ 
credit  society  with  its  speculative  operations,  and  founded 
as  it  was  without  any  adequate  system  of  supervision,  was 
absolutely  sure  to  make  mistakes. 

During  the  first  year,  1853,  it  carried  through  the  fol- 
lowing transactions: 

1.  Subscriptions  to  the  state  loan  of  250,000,000  francs 
for  the  Crimean  war. 

2.  Marketing  of  bonds  of  the  railroad  companies  of  the 
South,  the  East,  and  the  Grand  Central. 

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N atton  al      Monetary       Commission 

3.  Marketing  of  the  bonds  of  the  Credit  Foncier. 

4.  Loans  on  "  contangos  "  on  the  Bourse  which  made  the 
interest  rate  on  these  "  contangos  "  drop  from  12  per  cent 
to  3  per  cent. 

That  year  it  declared  dividends  equal  to  13.4  per  cent 
on  the  paid-in  capital. 

The  second  year,  1854,  it  continued  its  business  as  a 
financial  society;  it  offered  to  take  up  a  quarter  of  the 
state  loan  of  500,000,000  francs  for  the  Crimean  war;  it 
advanced  to  the  stockholders  of  the  railroad  companies 
(who  were  to  pay  for  their  shares  in  instalments)  the 
sums  needed  to  meet  the  successive  payments.  It  also 
marketed  railroad  bonds.  But  it  began  to  play  on  a  very 
large  scale  its  part  as  a  society  engaging  as  silent  part- 
ner in  great  industrial  enterprises. 

It  patronized  a  real  estate  construction  company — 
the  Compagnie  Immohiliere  de  Paris — especially  founded 
to  lengthen  the  Rue  de  Rivoli,  and  to  cooperate,  while 
making  profits,  in  beautifying  Paris. 

It  created  a  maritime  or  navigation  company,  with 
schemes  for  foreign  commerce,  colonization,  and  arma- 
ment, t 

Its  directors  founded  the  Austrian  Railroad  Company. 
France  began  from  this  time  on  to  carry  its  credit  and 
some  of  its  capital  to  foreign  countries. 

The  year  1855  marked  the  summit  of  success  and  power 
of  the  Credit  Mobilier.  It  continued  to  give  very  sub- 
stantial help  to  French  railroad  companies.  It  marketed 
their  bonds;  but  also  underwrote  their  loans,  advancing 
in  this  way  18,000,000  francs  in  return  for  65,000  bonds  to 
the  Western  Company,  which  had  been  formed  by  a  merger 

xoo 


Evolution     of    Credit     and     Banks 

with  several  small  roads.  In  1854  it  had  helped  to 
incorporate  into  one  company  several  different  companies 
which  managed  the  omnibuses  in  Paris.  In  the  same 
way  it  brought  about  the  merging  of  all  the  gas-lighting 
companies  of  Paris. 

The  part  the  company  played  in  regard  to  railroads 
was  excellent.  Thanks  to  the  Credit  Mobilier,  the  rail- 
roads during  the  years  from  1855  to  1857  were  able  to 
go  on  with  their  construction  work,  in  spite  of  the  latent 
crisis  caused  by  the  Crimean  war,  and  the  constant  calls 
on  pubHc  credit  made  by  the  State,  which  in  1855  nego- 
tiated a  third  war  loan  of  750,000,000  francs. 

This  year,  1855,  was  very  productive,  and  one  might 
say  very  prosperous  for  the  Credit  Mobilier.  The  profits 
amounted  to  no  less  than  28,000,000  francs.  The  direct- 
ors tried  to  use  a  portion  of  the  dividend,  and  instead 
of  paying  it  all,  to  give  only  a  fraction  of  it  to  the  share- 
holders in  order  to  avoid  an  unusual  rise  in  the  price  of 
shares.  But  this  arrangement  had  to  be  abandoned  on 
the  advice  of  the  Government,  and  40  per  cent  on  the 
shares  was  distributed  as  dividends. 

In  1856  the  Credit  Mobilier  turned  its  efforts  to  foreign 
countries,  especially  to  railroad  enterprises.  It  was  inter- 
ested in  Austrian,  Russian,  and  Spanish  railroads. 

From  1855  on,  the  reports  of  the  Soci^t^  du  Credit 
Mobilier  became  much  less  detailed  and  expHcit.  Its 
decline  was  beginning.  This  society  sought  too  much 
after  concessions  and  monopolies  and  only  rarely  took 
part  in  affairs  which  had  no  political  connections.  It 
turned  its  attention  especially  to  privileged  companies, 
such  as  railroading,  navigation,  or  general  transportation 

lOZ 


T-lt 


Il 


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National      Monetary       Commission 

in  cities.  From  another  point  of  view  it  was  too  anxious 
to  subscribe  to  state  loans.  Its  head  men,  it  seems,  were, 
moreover,  on  excellent  terms  with  the  public  authorities. 
That  led  the  Credit  Mobilier  to  take  part  in  the  operations 
we  have  already  mentioned,  of  a  real-estate  company 
working  to  beautify  Paris.  The  Credit  Mobilier  tied  up 
a  lot  of  capital  in  this  undertaking.  In  its  balance  sheet 
of  October  31,  1857,  it  carried  a  credit  in  its  favor  of 
80,000,000  francs  against  that  real  estate  company. 

The  Credit  Mobilier  was  not  able  to  carry  out  the  first 
intention  of  its  founders  in  regard  to  issuing  notes  as 
they  had  wished.  Their  desire  would  have  been  to  issue 
a  single  type  of  bonds  representing  all  the  securities 
quoted  on  the  Bourse.  This  special  type  of  bonds 
would  have  presented  only  a  difference  relating  to  the 
terms  of  payment.  Some,  short  dated,  w^ould  have  cor- 
responded to  the  temporary  investments  of  the  society ; 
the  others,  long  dated,  would  have  been  equivalent  to 
the  securities  which  the  society  had  successively  acquired 
and  which  had  no  set  terms  of  payment,  such  as  state 
funds  and  industrial  shares.  The  single  type  of  bonds 
was  to  have  the  advantage  of  facihtating  business  on  the 
Bourse,  and  was  to  "assume  the  characteristics  and 
play  the  role  of  paper  money,"  as  the  founders  of  this 
institution  expressed  it. 

The  danger  of  such  operations  is  patent.  It  is  issuing  on 
an  issue.  In  such  an  emergency  how  could  the  public 
be  assured  that  the  industrial  or  other  values  represented 
by  the  Credit  Mobilier  bonds  really  stood  for  industrial 
wealth,  such  as  raw  materials,  machinery,  factories,  mer- 


Evolution     of    Credit    and     Banks 

chandise?  How  could  this  same  public  know  if  these 
industrial  values  would  earn  revenues  to  pay  interest  to 
the  holder  of  Credit  Mobilier  bonds?  Further,  admitting 
that  the  very  difficult  management  of  such  an  institution, 
working  under  such  risky  conditions,  had  been  the  best 
possible,  it  would  have  been  necessary  that  the  capital 
securing  these  operations  should  amount  to  more  than 
that  of  the  Credit  Mobilier,  which  was  60,000,000  francs. 
Now,  as  we  know,  its  founders  would  have  liked  to  issue 
600,000,000  francs  in  bonds.  A  capital  of  one-tenth  of 
that,  certainly,  was  not  enough  to  cover  the  risks  of 
decline  and  especially  of  intrinsic  loss  in  the  securities 
owned  by  the  society.  In  any  case  this  capital  ought  to 
have  been  invested  safely  and  in  such  a  way  that  it  could 
be  available  on  the  first  alarm  and  when  needed. 

This  was  not  all.  Its  founders  hoped  to  spread  to 
other  countries  their  idea  of  the  mobilizing  of  securities 
by  the  one  kind  of  bond.  They  tried  to  fotmd  a  credit 
mobilier  in  Austria  and  succeeded  in  establishing  one  in 
Spain.  They  had  ambitious  aims,  and  thought  that  they 
could  unify  the  circulation  of  securities,  not  only  in 
France,  but  also  in  Europe.  In  this  way  they  thought 
no  capital  would  remain  unproductive. 

But  in  matters  relating  to  credit,  and  especially  credit 
tied  up  in  silent  partnerships,  ''there's  many  a  slip 
'twixt  cup  and  lip."  The  risks  in  industries  and  also  in 
stock-exchange  speculations  are  too  great  to  allow  of  such 
hopes.  If  the  issue  of  a  bank  note,  properly  so  called, 
offers  every  security,  it  is  because  it  represents  short- 
dated  commercial  pap^r,  bills  which  are  the  result  of 


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Evolution     of    Credit     and     Banks 


operations  already  transacted,  the  real  security  of  which 
(although  not  acknowledged)  is  merchandise  of  current 
sale  and  consumption.  Short  terms  of  payment  (fifteen 
days,  one,  two,  or  three  months)  give  continual  assur- 
ance of  available  ftmds;  the  certain  operation  of  the  sale 
of  a  piece  of  merchandise,  which  sale  will  allow  the  pay- 
ment of  a  bill  falling  due,  is  likewise  safe,  when  the  dis- 
coimt  of  paper  is  submitted  to  an  enlightened  examina- 
tion. There  is  then  no  connection  between  the  issue  of  a 
bank  note,  which  represents  bills  of  commerce,  or  cash, 
and  the  issue  of  bonds  representing  state  securities,  or  indus- 
trial securities,  the  safety  of  which  is  not  of  a  kind  to  allow 
their  circulation  to  such  a  wide  extent.  To  be  siue,  these 
bonds  were  to  be  paid  on  maturity,  whereas  the  bank  note 
must  be  paid  on  sight.  Nevertheless  these  bonds  were  sub- 
ject to  the  ups  and  downs  of  the  market,  and  at  the  times 
they  were  due,  they  had  to  be  paid,  and,  what  is  more,  to 
have  their  interest  guaranteed  each  year.  With  what? 
With  the  income  on  industrial  shares  and  state  funds,  and, 
even  then,  it  was  necessary  to  allow  these  bonds  a  higher 
interest  than  that  on  state  funds .  Otherwise  how  could  the 
public  be  expected  to  prefer  the  bonds?  As  to  industrial 
shares,  their  dividends  were  destined  to  be  an  important 
resource.  But  in  that  case  it  is  dangerous  to  enter  as  a 
partner  into  a  new  industry  the  fate  of  which  you  can  not 
foresee.  You  should  therefore  become  a  partner  only  in 
those  enterprises  already  on  the  road  to  success,  but  then 
partnership  banks  (banques  commanditaires)  were  not 
established  for  such  enterprises  which  find  credit  easily 
enough  in  commercial  banks,  since  their  capital  is  already 


A 


raised,  and  they  need  funds  only  for  running  expenses. 
Hence  it  follows  that  partnership  banks,  useful  and  nec- 
essary in  industrial  countries,  are  not  destined  to  follow 
the  methods  devised  by  the  founders  of  the  Credit 
MobiUer. 

Besides,  this  method  fortunately  was  not  applied  on  a 
large  scale  by  the  founders  of  the  Credit  Mobilier.  Never- 
theless the  speculations  carried  on  by  it  and  under  its 
influence  caused  many  failures.  The  growth  of  specula- 
tion in  France  dates  from  this  time. 

Finally,  the  first  condition  for  a  partnership  and  invest- 
ment bank  {banqtie  commanditaire  et  de  placement)  is  to 
have  enHghtened  directors,  acquainted  with  industrial 
conditions  in  such  a  way  that  they  will  not  be  carried  off 
their  feet  by  the  enthusiastic  reports  of  engineers  or  in- 
ventors, and  risk  capital  in  impossible  enterprises  or  those 
predestined  to  failm-e.  To  this  end  there  is  needed  a  staff 
of  business  men,  both  well  informed  and  practical,  with 
no  pretensions  to  being  universal  or  ubiquitous.  Now, 
these  were  not  the  particular  qualities  sought  after  by  the 
Credit  MobiHer  in  choosing  the  directors  for  its  industrial 
companies.  The  fact  may  be  cited  that  in  1863  one  of 
these  directors  belonged  to  the  administrative  board  of  19 
companies,  engaged  in  almost  as  many  different  kinds  of 
business,  and  calHng  for  very  wide  and  different  apti- 
tudes. The  capital  of  these  companies  represented  three 
biUion  and  a  half  francs. 

After  having  tried  in  vain  to  have  the  Bank  of  Savoy 
continued  (Savoy  was  annexed  to  France  in  1865);  con- 
sidering that  they  would  not  be  able  to  use  this  bank,  as 


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Evolution     of    Credit     and     Banks 


fl 


they  hoped,  for  issuing  bank  notes ;  and  having  need  then 
of  capital,  they  doubled  their  capital,  raising  it  in  1866 
from  60,000,000  to  1 20,000,000  francs.  But  that  was  a 
bad  year.  The  fiscal  year  of  the  Credit  Mobilier  showed 
a  net  loss  of  nearly  8,000,000  francs.  In  1867  there  was 
great  embarrassment  and  growing  difficulties.  The  found- 
ers retired.  On  November  30,  1867,  their  successors 
stated  that  the  losses  then  amounted  to  47,500,000  francs. 
'  From  that  time  on  the  Credit  MobiHer  virtually  entered 
into  liquidation. 

Since  that  period  no  houses  of  that  kind  have  been 
founded  on  those  same  principles  in  France.  Many  small 
banking  houses  meanwhile  have  done  business  in  disposing 
of  securities,  but  they  have  not  had  the  ambitions  or  the 
importance  of  the  Credit  Mobilier.  Since  then  a  large 
estabhshment,  the  Banque  de  Paris  et  des  Pays-Bas,  car- 
ries on  this  business  of  an  investment  bank,  and  of  helping 
to  create  new  industries,  chiefly  those  on  a  large  scale; 
it  also  negotiates  public  loans.  But  this  bank  has  not 
attempted,  any  more  than  the  Banque  de  V Union  Parisi- 
enne  (which  carries  on  the  same  operations)  to  take  up 
again  the  system  of  issuing  bonds  representing  the 
securities  it  possesses. 

The  three  successive  institutions  established  by  M.  Mir^s 
all  rested,  almost  exclusively,  on  the  idea  of  speculation. 
Hence  the  operations  consisted  in  buying  and  seUing  on  the 
Bourse  public  securities,  industrial  and  railroad  shares,  etc. 
M.  Mires's  first  establishment  was  called  Caisse  des  Actions 
Reunies.  It  was  founded  on  the  principle  of  the  commandite. 
Its  original  capital  was  5,000,000  francs,  in  1,000-franc 


/ 


shares,  which  could  be  subdivided  into  share  coupons  of  500 
francs.  Its  success  was  rather  marked  during  its  early 
years.  M.  Mir^s  wanted  to  extend  its  field  of  operations,  and 
under  the  name  of  Caisse  et  Journal  des  Chemins  defer,'^  he 
enlarged  his  first  house,  increasing  the  capital  to  1 2 ,000,000 
francs.  This  time  he  tried  to  imitate  the  Credit  MobiHer, 
which  had  just  increased  its  capital.  He  wanted  soon  to 
be  as  large  as  the  Credit  MobiHer  and  increased  his  capital 
to  50,000,000  francs.  The  estabhshment  was  called  Caisse 
Generale  des  Chemins  de  fer.  M.  Mir^s  had  not,  Hke 
Messrs.  Pereire,  any  very  firm  friends  in  the  Government 
at  that  time;  the  higher  administration  did  not  favor  his 
operations.  He  was  active  in  outside  schemes  and  took 
part  in  the  Spanish  loan  of  800,000,000  reals;  he  under- 
took to  float  the  Roman  railroad  company,  and  the  Turk- 
ish loan,  etc.  Soon  his  institution  went  under.  He  was 
an  energetic  man,  but  had  founded  banks  on  a  false  idea 
of  industrial  credit.  He  did  not  render  any  services,  but 
rather  helped  to  spread  the  taste  for  gambling  and  specu- 
lating in  France. 

Here  I  must  mention  another  establishment  founded  in 
1862  after  the  disappearance  of  the  Caisse  Generale  des 
Chemins  de  fer.  The  lucrative  workings  of  the  Credit 
MobiHer,  which  had  up  to  that  time  revolutionized  the 
methods  of  capitalists  and  acquired  a  real  vogue,  forced 
a  certain  number  of  Paris  bankers  and  large  capitaHsts  to 
found  a  house  on  the  model  of  that  established  by  the 
Pereire  brothers.  It  could  not  start  out  as  a  joint-stock 
company.     It  needed  an  authorization  which  it  could  not 


oHe  had  founded  in  1842  the  Journal  des  Chemins  de  fer,  a  financial 
paper. 


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National      Monetary       Commission 

get,  because  the  Credit  Mobilier  stcxxi  in  its  way.  It 
ended  by  getting  its  authorization  in  1864.  '^h^  Govern- 
ment had  become  more  liberal  in  this  respect,  and  the  law 
of  May  23,  1863,  on  limited  liability  companies,  was  the 
beginning  of  hoped-for  legislation  still  wider  in  scope.  The 
statutes  of  the  Societe  pour  le  Developpement  du  Commerce 
et  de  r Industrie  en  France  were  then  approved.  The  nomi- 
nal capital  was  1 20,000,000  francs,  and  the  actual  capital 
60,000,000  francs.  A  fact  to  remember  is  that  this  bank, 
aiming  to  be  a  partnership  and  investment  bank,  also  car- 
ried on  all  the  other  operations  of  commercial  banks.  It 
did  not  practice  the  division  of  risks;  on  the  contrary,  it 
mixed  them  up  just  as  did  the  Maison  Laffitte-Gouin,  of 
which  we  have  spoken.  This  point  of  departiu'e  needed 
to  be  dwelt  on  to  show  the  evolution  followed  later  on  by 
the  French  credit  societies. 


108 


Chapter  III. — The  first  Comptoir  d'Escompte  and  the  de- 
velopment of  commerce — The  laws  of  May  23-2^,  and  July 
24,  i86y^  on  companies. 

Review  of  the  chief  reasons  for  creating  the  Comptoir  d'Escompte  at  the  time  of  the 
panic  of  1848.— Certain  comptoirs  d'escompte  continued  to  exist  after  the  panic  of 
1848.  That  in  Paris  develops.— The  interesting  study  of  the  Paris  Comptoir  d'Es- 
compte in  its  relation  to  the  history  of  French  credit.— The  Comptoir  d'Escompte 
de  Paris.  Lengthening  the  existence  of  this  society  to  1857.— The  increase  of  the 
orighial  capital  hi  1853.— The  Comptoir  d'Escompte  of  Paris  gradually  loosens  its 
ties  with  the  State  and  the  city  of  Paris.— Lengthening  the  existence  of  the  Comp- 
toir d'Escompte.  It  pays  baclc  the  State  and  becomes  freer.— The  Comptoir  d'Es- 
compte is  authorized  to  advance  money  on  titles  and  subscriptions.— Development 
of  the  Bank.— The  treaties  of  1860  with  England.  Extension  of  commerce.— Special 
commerce  of  France  with  foreign  countries  before  and  after  the  treaties  of  I860.— 
Widening  the  field  of  operation  of  the  Comptoir  d'Escompte.— It  is  allowed  to  start 
agencies  in  France,  in  the  French  colonies,  and  in  foreign  countries.— Facilities 
and  guaranties  for  new  operations.- Founding  of  agencies  in  Asia.— Its  capital 
doubles.— State  guardianship  of  credit  companies.— The  Comptoir  d'Escompte 
helps  the  colonial  banks.— Services  rendered  by  the  Comptoir  in  Asia.— It  starts 
other  agencies  in  Asia.— Increase  in  business.— The  capital,  doubled  again, 
reaches  80,000,000  francs.— The  laws  of  May  23  and  29, 1863,  and  of  July  24, 1867.— 
Lawof  1863.— Law  of  1867(Soci6t6s  en  Commanditepar  Actions).— These  laws  were 
Indispensable  in  view  of  the  evolution  of  hidustries  and  the  growth  of  important 
enterprises.— Growth  of  savings  in  France.  Capital  is  created  there.— The  Comp- 
toir d'Escompte  enlarges  its  business. 

We  have  just  described  the  founding,  the  working,  and 
the  decline  followed  by  the  disappearance  of  the  Credit 
Mobilier,  an  institution  of  the  so-called  partnership  and 
investment  type.  We  have  seen  the  causes  of  its  fall;  the 
mistakes  it  committed,  and  also  to  a  certain  extent  the 
services  it  rendered.  Now  we  are  going  to  trace  the  evo- 
lution of  a  bank  of  commerce,  properly  speaking,  prac- 
ticing the  fundamental  business  of  that  kind  of  bank, 
namely,  discount.  Besides,  it  is  the  origin  of  the  large 
credit  companies,  which  appear  in  embryonic  form,  with 
the  Comptoir  d'Escompte. 


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II 


ft 

In  1830  there  had  been  an  ephemeral  Comptoir 
d'Escompte,  which  a  crisis  at  the  close  of  1830  and  1831 
had  caused  to  be  founded  under  almost  the  same  condi- 
tions as  the  one  we  are  going  to  talk  about.  Its  capital 
had  been  furnished  by  the  State.  Its  operations  lasted 
two  years.  Its  creation  had  been  agreed  upon  so  that  it 
could  serve  as  intermediary  between  merchants,  manu- 
facturers, etc.,  and  the  Bank  of  France.  Other  private 
banks  had  raised  the  rate  of  discount.  Now,  the  Bank  of 
France  accepted  only  paper  or  commercial  effects  with 
three  signatures ;  it  was  rather  expensive  to  get  the  third 
signature.  This  establishment,  then,  was  started  for  the 
purpose  of  making  the  third  signature  cheaper. 

The  Comptoir  d'Escompte,  founded  in  1848,  in  the 
midst  of  a  panic  more  serious  than  that  of  1830-31, 
grew  out  of  conditions  not  unlike  those  which  gave  birth 
to  the  ephemeral  Comptoir  d'Escompte  of  1830. 

We  have,  moreover,  traced  above  the  facts  which  led  to 
the  organizing  of  comptoirs  d'escompte  by  the  provisional 
government  of  1848.  We  have  seen  what  services  they 
rendered.  It  was  supposed  that,  like  the  Comptoir  d'Es- 
compte of  1830-31,  they  were  destined  to  disappear  when 
the  panic  was  over.  Now,  to  note  a  rather  curious  fact, 
this  creation  of  the  State's,  which  had  received  its  first 
modest  capital  like  a  sort  of  charity  collection,  which  had 
above  all  owed  its  organization  and  earliest  resources  to 
the  State  and  to  the  city  of  Paris,  did  not  disappear,  nor 
did  certain  other  Comptoirs  in  the  provinces  founded 
under  the  same  conditions.  The  Bank  in  Paris  was 
destined  little  by  little  to  rise  and  free  itself  from  its 


/ 


Evolution     of    Credit     and     Banks 

connections  with  the  State  and  city  of  Paris  which  had 
been  necessary  at  the  start;  then  to  overcome  many 
prejudices  in  order  to  improve  its  statutes,  and  to  have 
these  improvements  accepted  by  the  public  authorities. 

It  is  an  interesting  subject  for  study  because  it  was  the 
opening  wedge,  if  one  may  so  express  it,  for  those  insti- 
tutions which  later  on,  under  the  name  of  Grandes  So- 
cietes  de  Credit,  modified  so  fundamentally  the  general 
organization  of  credit  in  France.  Better  still,  it  has  served 
to  a  certain  extent  as  a  guide  in  this  evolution.  Several 
of  these  credit  societies,  indeed,  started  by  being  banks 
more  given  to  speculation  and  investment  than  to  com- 
mercial operations.  The  Comptoir  d'Escompte,  on  the 
contrary,  has  always  fulfilled  the  functions  which  its  firm 
name  indicated  and  its  origin  had  given  it.  Though  it 
happened  to  deviate  momentarily  from  this  line  of 
conduct  in  order  to  speculate  in  the  most  dangerous 
way  imaginable  for  a  credit  company,  and  though 
it  disappeared  in  the  storm  it  had  started,  the  new 
and  reorganized  Comptoir  d'Escompte  took  up  again 
the  good  traditions  of  the  old  one,  and  was  able  at  its 
organization  to  apply  all  the  improvements  necessitated 
by  the  needs  of  modern  commerce  and  industry.  So  the 
Comptoir  d'Escompte  is  the  type  of  the  French  credit 
institution.  It  stands  all  through  the  latter  half  of  the 
nineteenth  century  to  the  present  day  as  the  sign  post  on 
the  road  followed  by  credit  institutions  in  France. 

In  1850  the  first  lengthening  of  the  term  of  existence  of 
the  Comptoir  d'Escompte  de  Paris  was  made  to  extend 
to  March  18,  1857.     Its  capital  was  still  about  the  same 


no 


III 


; 


II 


N ational      Monetary      Commiss  ion 

as  at  the  start — ^that  is,  very  unimportant — and  rose 
to  4,200,000  francs.  But  it  had  at  its  disposal  about 
8,000,000  francs  in  deposits  and  current  accounts,  and 
the  Treasury  continued  its  subsidiary  loan  of  3,000,000 
francs.  Bills  of  all  kinds  discoimted  in  1850  rose  to  a 
total  of  nearly  128,000,000  francs.  That  year  the  share- 
holders felt  that  they  had  achieved  something  not  only 
for  the  public  good,  but  also  very  profitable  for  them- 
selves, since  they  received  a  dividend  of  7  per  cent  of 
the  nominal  capital.  Success  increased  in  the  years 
following. 

In  1853  the  capital  was  increased  to  20,000,000  francs. 
Why?  Because  the  original  capital  of  6,500,000  was  too 
small  to  offer  a  sufficient  guaranty,  since  the  business  of 
the  Discount  Bank  had  increased  very  greatly.  In  1852 
the  discount  of  bills  with  two  signatures,  that  of  war- 
rants or  receipts  of  merchandise,  bills  coming  from  branch 
banks,  made  up  a  total  which,  with  the  addition  of  foreign 
securities,  rose  to  more  than  248,000,000  francs;  and  the 
Comptoir  d'Escompte  had,  according  to  the  statement  of 
Jime  30,  1852,  15,000,000  francs  in  ciurent  credit  ac- 
counts— that  is  to  say,  15,000,000  francs  in  deposits. 
Adding  the  non-negotiable  guaranteed  capital  to  these 
20,000,000  of  accumulated  capital — capital  furnished  by 
the  State  and  the  city  of  Paris— the  whole  capital  reached 
33»333»ooo  francs. 

But  this  gradual  transformation  of  an  institution  sup- 
ported by  the  State  which,  as  it  grew,  was  freeing 
itself  httle  by  little  from  this  protection,  was  destined 
to  bring  about  a  lessening  of  the  guaranties  sanctioned 
by  the  State  and  the  City  of  Paris.     The  share  capital 


Evolution     of    Credit     and     Banks 

increased  at  the  same  time  that  the  guaranteed  capital 
remained  stationary.  It  was  then  decided  to  reduce  the 
guaranty  of  the  State  and  the  City  of  Paris  from  a  thu-d 
to  a  fifth  of  the  total  capital.  Moreover,  the  Government 
announced  to  the  directors  of  the  Comptoir  d'Escompte 
that  the  issue  of  share  capital  was  to  be  carried  out  before 
December  31,  1854,  so  as  to  allow  the  cancellation  at 
that  date  of  the  guaranties  and  the  repayment  of  the 
3,000,000  francs  loaned  by  the  State. 

This  decision  took  on  a  general  character  in  the  law 
of  June  10,  1853,  for  it  was  appHed  to  the  Comptoir 
d'Escompte  of  Paris  and  those  of  the  departments. 

These  measures  were  necessary  because  in  1853  the 
discounts  reached  more  than  double  what  they  had  been 
in  1852— that  is  to  say,  500,000,000  francs. 

While  taking  back  its  guaranty,  the  State  prolonged 
for  a  term  of  thirty  years,  beginning  March  18,  1857,  the 
duration  of  the  Soci^td  du  Comptoir  d'Escompte.     Thus 
the  Comptoir  d'Escompte  became  free.     Formerly,  indeed, 
the  directors  nominated  by  the  Minister  of  Finance  repre- 
sented the  State's  interests.     They  supervised  all  opera- 
tions, since  these  could  not  be  carried  on  without  their 
authorization.     The  Minister  himself  alone  authorized  the 
sending  out  of  dividends   to   the  shareholders.     Three 
delegates  of  the  Paris  municipal  council  represented  the 
interests  of  that  city  and  took  part  in  the  meetings  of 
the  council  of  administration  and  the  general  meetings 
of  shareholders. 

New  statutes  were  drawn  up  and  approved  by  the 
decree  of  July  28,  1854.     The  directors  were  in  future  to 


1971— 1< 


-8 


112 


"3 


ifi 
III 


National      Monetary      Commission 

be  nominated  by  the  general*  meeting  of  shareholders. 
The  Mmister  of  Finance  had  nevertheless  reserved  for 
himself  the  right  of  approval.  Its  operations  became 
more  extended.  To  all  those  which  it  was  accustomed 
to  carry  on  were  added  others,  such  as  advances  on 
government  securities,  on  shares,  and  bonds;  the 
opening  for  a  third  party,  and  at  a  commission  agreed 
upon,  of  subscriptions  to  public  loans,  or  to  loans  issued 
for  the  capital  needs  of  all  joint  stock  companies,  always 
subject  to  the  authorization  of  the  Minister  of  Fmance. 

In  spite  of  this  interference  the  Bank,  which  from  that 
time  forth  was  called  the  Comptoir  d'Escompte  de  Paris, 
carries  on  its  business  imder  its  new  statutes. 

Here,  finally,  is  a  table  of  the  operations  in  discount  of 
this  institution  from  1853-54  to  1859-60: 


Financial  year. 


Total  number 

of  bills 

discounted. 


Sum  total 

of 

discounts 

in  million 

francs. 


1853-54- 
1854-55- 
1855-56. 
1856-57- 
1857-58- 
1858-59. 
1859-60. 


837.000 
877.000 
936,000 
942, 000 
985,000 
999, 000 
, 000, 000 


638 
653 
704 
683 

66s 
663 
680 


Average 
of  current 

credit 

accounts, 

in  million 

francs. 


aa 

30 

Z9 
x8 
x8 
ao 
ao 


The  number  of  commercial  bills  discoimted  increased, 
but  the  sum  total  in  million  francs,  after  having 
increased,  too,  until  1855-56,  went  down  in  1856-57. 
You  see,  nevertheless,  what  services  the  Comptoir  rendered 
to  trade;  the  average  of  each  bill  in  1856-57  was  found 
to  be  723  francs  in  round  numbers.    The  falling  off  of 

114 


Evolution     of    Credit     and     Banks 

the  sum  total  of  discounts  during  the  last  year  has  to 
do  with  the  crisis  of  1857.  The  crisis  lasted  until  1859, 
for  we  see  the  figure  representing  the  total  of  discounts 
going  down  to  665,000,000  francs  in  1857-58,  and  to 
663,000,000  francs  in  1858-59.  The  rise  began  again 
in  1859-60.  The  current  credit  accounts  did  not  in- 
crease and  show  rather  a  falling  off  from  1853-54  to 
1858-59.  It  has  been  said  that  at  that  time  capital 
was  being  absorbed  by  public  loans  and  by  loans 
to  large  railroad  companies.  We  must  also  note  that 
the  Bank  was  not  allowed  to  accept  in  current  accounts 
a  sum  more  than  one  and  a  half  times  the  net  cash 
capital.  This  clause  prevented  the  current  accounts 
from  increasing,  and  at  bottom  this  measure  favored 
the  Bank  of  France.  In  any  case  this  restriction  dimin- 
ished public  confidence. 

COMMERCIAI.  TREATIES   OF    1860. 

We  have  seen  the  movement  of  high  finance  set  in  mo- 
tion in  France  between  the  years  1849  and  1865  by  the 
public  loans  for  wars  or  needs  of  the  budget,  and  loans 
made  by  the  railroad  companies.  The  review  of  the 
Credit  Mobilier  has  enabled  us  to  trace  in  its  development 
the  important  part  played  by  these  two  chief  causes  in 
the  accumulation  of  capital  and  its  circulation  in  France 
during  this  period  of  fifteen  to  eighteen  years.  These 
facts  emphasize  the  phenomenon  of  the  creation  of  capital 
by  saving,  and  it  is  a  striking  point  that  France,  even 
at  that  time,  was  sending  money  out  of  the  country  to 
finance  industrial  enterprises,  especially  railroads. 


115 


National      Monetary       Co 


mmtsston 


But  if  these  elements  of  productive  power  were  the 
cause  of  a  general  economic  activity  in  France,  they 
did  not  have  such  an  immediate  effect  on  commerce  and 
international  exchanges  as  the  treaty  with  England,  con- 
cluded on  January  23,  i860.  France  giving  up  the  narrow 
protective  system  followed  until  then,  threw  wide  open  its 
frontiers  to  English  trade.  The  country  did  not  have  to 
repent  it.  The  following  table  shows  the  movement  of 
special  commerce  during  the  five  years  before  the  com- 
mercial treaties  of  i860  and  the  years  which  followed  until 
the  war  of  1870-71: 

[Million  francs.] 


Year. 

Imports. 

Exports. 

Total. 

I8S5 

1.594 
1.989 
1.873 
1.563 

1.  640 

1.897 
2.442 
2,199 

2,  426 
2.528 
2.641 

2.793 
3.026 

3.304 
3.153 

1.558 

1.893 
1.866 
1.887 
2.  266 
2.277 
1,926 

2.  242 

2,  642 
2.924 
3.088 

3.  180 
2,826 
2.790 
3.07S 

1856 

3.152 

1857 

3.882 

1858.. 

3.739 

1859 

3. 450 

i860.. 

3.906 

1861 

4.174 

1862 

4.368 

1863 

4.441 

1864 

5,068 

186s -- 

5.452 

1866 

5.729 

1867 

5.973 

1868 

5.852 

1869 

6.094 

6.  228 

Now,  here  are  some  statistics  showing  the  general  com- 
mercial development  of  railroads  between  the  years  1855 
and  1869.  We  have  not  given  the  figures  for  every  year, 
thinking  that  those  given  are  enough  to  show  the  enor- 
mous growth  of  length  of  lines  and  of  the  movement  of 
traffic  during  this  period. 


116 


Evolution     of    Credit     and     Banks 


French  raUroads. 


Year 


1855- 
i860. 

1865. 
1869. 


Length  of 

roads,  in 

kilometers 


5.037 

9, 167 

13.227 

16,465 


Total  net 


Net  )si\o- 


proceeds.in^!Sf?!?- 


million 
francs. 


155 
230 
310 
38s 


ceeds,  in 

thousand 

francs. 


310 
25.0 
23- 5 
23.3 


Number  of  I  Number  of 
passengers.l     ^^s  of 
by  mil- 


lions 


330 
56.  5 

81. 5 

III.  o 


merchan- 
dise, in  mil- 
lion tons. 


10.  6 
23.0 
34- o 
44- o 


The  Comptoir  d'Escompte  of  Paris  did  its  best  to  profit 
by  the  revival  of  trade  destined  to  follow  the  conclusion 
of  the  treaties  of  January  23,  i860,  with  England,  and 
helped  on  by  the  development  of  French  railroads. 

First  of  all,  it  was  important  to  extend  the  workings 
of  this  credit  estabhshment  both  at  home  and  abroad. 
So  it  had  to  win  a  little  more  Hberty,  and  not  remain 
under  too  narrow  a  charter.     The   State,  indeed,   had 
only  conceded   under  restricted  conditions  its  right  to 
become  a    stock    bank    imder    the    title    of    Comptoir 
d'Escompte    de    Paris.     This    time    the    Government 
did  not  refuse  to    back  up  the   plans  of   the  institu- 
tion.    The  decree  of  May  25,  i860,  approved  the  modi- 
fications of  the  statutes  put  forward  by  the  directors. 
These    modifications    were    the    authorization    to    start 
agencies  in  France,  in  the  French  colonies,  and  abroad, 
with  the  approval  of  the  Minister  of  Finance.      Further, 
in  order  to  carry  on  operations  made  necessary  by  these 
agencies,  the  Bank  was  authorized  to  accept  orders,  drafts, 
and  letters  of  exchange  which  should  be  secured  by  trans- 
fers of  bills  of  lading  and  bottomry;   to  discount  up  to  a 
term  of   one  hundred  and  eighty  days  sight  commercial 
bills  backed  up  by  bills  of  lading. 


117 


National      Monetary      Commission 

A  few  days  later  two  agencies  were  founded,  one  in 
Shanghai,  China,  the  other  in  Calcutta.  India. 

On  August  30,  i860,  the  Comptoir  d'Escompte  was 
authorized  to  double  its  capital  from  20,000,000  to 
40,000,000  francs.  The  issue  of  40,000  new  shares  was 
entirely  successful. 

Let  us  point  out  here  this  fact,  that  an  institution  of 
credit  must  be  authorized,  as  we  have  just  seen,  in  order 
to  increase  its  capital.  The  management  of  institutions 
of  credit  founded  as  joint  stock  companies,  or  even  in 
the  form  of  silent  partnerships,  was  imder  the  pro- 
tection of  the  State.  So  it  is  not  to  be  wondered  at 
that  a  greater  munber  of  important  credit  companies 
are  not  fotmded.  Except  for  the  unexpected  revolution 
of  1848  and  the  panic  which  resulted  from  it  the  Comptoir 
would  probably  never  have  existed.  It  was,  indeed,  the 
first  credit  society  in  France  which  attained  its  defini- 
tive form  from  the  start,  that  of  a  bank  of  commerce — 
that  is  to  say,  of  discount  with  all  the  operations  that 

go  with  it. 

About  the  same  time,  in  i860,  the  Comptoir  d'Escompte 
helped  with  loans  of  money  certain  colonial  banks 
(those  of  Martinique,  of  Reunion,  and  Guadeloupe). 
These  banks  of  issue  were  obUged  to  put  their  capital 
into  government  sectirities  as  a  guaranty  for  issuing 
their  notes  for  equivalent  sums.  Now,  their  power  of 
credit  was  soon  spent.  After  having  turned  into  money 
the  securities  which  they  held— that  is  to  say,  put  into 
circulation  that  part  of  the  state  debt  which  they  pos- 
sessed—nothing was  left  them  to  do  business  with.    The 


X18 


Evolution     of    Credit     and     Banks 

Comptoir  d'Escompte  guaranteed  credits  for  them  or 
loaned  them  money,  and  later  it  extended  this  opera- 
tion to  the  banks  of  Guiana  and  Senegal. 

And  so  the  Comptoir  was  established  in  the  Far  East, 
and  its  influence  was  felt  in  our  colonies.  It  soon  showed 
that  its  agencies  were  useful.  The  one  in  Shanghai, 
besides  its  current  business,  collected  the  war  indemnity 
due  the  French  Government  after  our  Chinese  expedi- 
tion. Moreover,  the  new  treaty  gave  French  merchants 
the  right  of  opening  up  relations  with  the  Chinese  Empire. 
So  it  was  a  valuable  help  to  our  countrymen.  In  Cal- 
cutta the  economic  movement  took  on  all  the  greater 
importance  because  the  civil  war  in  the  United  States 
made  India  the  center  of  the  cotton  supply  for  Europe. 

These  first  successes  caused  new  Asiatic  agencies  to  be 
founded  in  1861  and  1862  in  Bombay,  India;  Saifeon, 
Indo-China;  and  Hongkong. 

During  this  time  the  business  of  the  Comptoir  was 
spreading  and  taking  on  an  importance  little  in  keeping 
with  its  capital.  It  had  extended  greatly  its  activities 
in  the  provinces,  in  the  principal  French  cities,  having 
accoimts  with  the  bankers  of  these  cities  and  keeping 
their  accounts  in  turn.  Profits  were  good.  For  the 
financial  year  1 865-66  the  dividend  was  12.7  per  cent 
on  the  capital.  It  is  true  that  the  discotmt  and  banking 
operations  had  been  1,000,800,000  francs  for  that  year 
and  that  in  Indo-China  business  had  amounted  to  more 
than  700,000,000  francs. 

The  capital  then  was  increased  to  80,000,000  francs. 
The  subscription  succeeded  admirably,  which  was  not 
surprising. 

1Z9 


•II 


I 


, 


1 


National      Monetary      Commission 

THE     INFLUENCE     OF     MORE     LIBERAL     LEGISLATION     ON 
BUSINESS  IN  GENERAL  AND  ON  CREDIT  IN  PARTICULAR. 

In  the  period  from  1863  to  1867  new  laws  were  passed 
which  have  had  a  very  great  influence  on  the  develop- 
ment of  large  industries  and  credit  institutions.  We 
shall  take  these  laws  into  account  only  so  far  as  they 
concern  the  latter. 

Before  the  law  of  May  23-29,  1863,  no  joint  stock  com- 
pany could  be  founded  without  the  authorization  of  the 
ruler  and  without  his  approval  of  the  act  which  consti- 
tuted the  society.  This  law  did  away  with  this  authori- 
zation, but  stipulated  that  the  capital  of  the  society 
could  not  be  more  than  20,000,000  francs.  The  shares 
forming  the  capital  fixed  on  by  the  foimders  were  to  be 
completely  subscribed  for,  but  the  law  required  that  only 
a  quarter  of  the  capital  issued  be  paid  in.  The  direct- 
ors nominated  by  the  general  assembly  of  shareholders 
(which  approves  the  statutes)  must  own  in  equal  lots 
one-twentieth  of  the  society's  capital,  and  the  shares 
forming  this  twentieth  were  not  to  be  sold.  They  were 
personal  and  untransferable.  One  article  of  this  law 
stipulated  with  reference  to  supervision  that  the  general 
assembly  of  shareholders  should  pick  out  one  or  more 
special  commissioners  to  report  to  the  general  assembly 
on  the  condition  of  the  society.  Then  certain  measures 
for  publicity  were  enacted  (the  registering  of  the  statutes 
and  amendments  of  these  statutes  in  the  court  record 
office)  and  other  measures  of  order  and  procedure  for  the 
general  assembly  of  shareholders. 


Evolution     of    Credit     and     Banks 

The  law  of  July  24,  1867,  repealed  the  law  of  June  23, 
1863.  This  law  of  1867  treated  with  limited  liability 
partnerships  issuing  shares  (societes  en  commandite  par 
actions)  and  joint-stock  companies.  It  no  longer  limited 
the  capital  stock  of  companies  and  it  increased  the  pub- 
licity by  requiring  the  statutes  or  changes  of  statutes  to 
be  inserted  in  at  least  one  newspaper,  specified  for  receiv- 
ing legal  notices.  As  in  the  law  of  1863,  the  directors 
were  to  be  chosen  for  six  years,  but  they  were  eligible  for 
reelection.  The  number  of  shares  which  they  may  own 
was  determined  by  statute.  Finally  this  law,  while  organ- 
izing a  sort  of  parhamentary  system  for  joint-stock 
companies,  of  which  the  general  assembly  of  shareholders 
was  the  foundation,  gave  real  freedom,  a  more  flexible 
instrument  than  the  law  of  1863,  to  industry,  trade,  and 
banking. 

The  law  was  indispensable  because  of  the  growth  of 
large  industries,  and  the  natural  concentration  of  capital. 
The  old  mould  had  to  be  broken  in  order  to  keep  up  with 
the  general  economic  movement  marked  by  the  control- 
ling influence  of  new  scientific  inventions  and  their  appli- 
cation to  industry.  The  steam  engine,  the  locomotive, 
the  beginnings  of  electricity— all  revolutionized  the  condi- 
tions of  industry.  Concentration  of  capital  was  becom- 
ing necessary  even  then,  and  a  mathematical  function,  as 
it  were,  of  the  tendency  of  industries  to  concentrate. 

Besides,  this  capital  did  not  belong  to  large  capitalists; 
capital  was  being  collected  also  in  the  middle  classes  and 
all  ranks  of  society. 


120 


121 


National      Monetary      Commission 

Here  is  an  indication  of  this  fact,  as  shown  in  the 
development  of  savings  banks. 


Year. 


183s- 
1841. 
1851. 
1861. 
1865. 
1867- 


Number 

of  savings 

banks. 


159 
301 
366 
459 
497 
513 


Number 

of  branch 

banks. 


55 
159 
159 
243 
47S 
564 


Balance 
due  de- 
positors 
(million 
francs). 


62 

249 
0158 
401 
493 
571 


Private 

property 

of  the 

banks 

(million 

francs). 


S 

10 
tj 
14 


«This  low  figure  is  due  to  the  panics  of  1847.  1848.  1849.  and  also  to  the  political 
crisis  of  that  period. 

In  the  year  1869,  preceding  the  Franco-Prussian  war, 
the  balance  due  to  depositors  rose  to  711,000,000  francs. 

That  was  only  an  indication.  The  middle  classes 
were  investing  their  money  in  railroad  and  city  bonds 
and  in  government  securities.  The  Credit  MobiHer  and 
the  other  institutions  of  that  kind  did  not  create  the 
taste  for  saving  money  in  France;  they  only  directed  it 
toward  transferable  securities.  It  is  even  a  fortunate 
accident  that  the  Credit  Mobilier  gradually  disappeared, 
succumbing  imder  mistakes  which  opened  the  eyes  of 
the  least  farseeing  to  the  danger  of  speculative  crazes. 
We  in  France  have  not  always  been  immune  from  these 
crazes  since  then,  but  the  attacks  for  most  of  the  savers 
have  been  only  temporary.  The  great  majority  of  the 
very  numerous  persons  who  accumulate  capital  has 
always  after  the  storm  taken  up  again  the  patient,  per- 
sistent work  of  saving. 


122 


Evolution     of    Credit     and     Banks 

Now  that  we  have  set  forth  these  reflections  and  these 
facts  to  show  in  what  surroimdings  the  French  credit 
institutions  developed  and  what  laws  helped  in  this  de- 
velopment, we  may  return  to  the  Comptoir  d'Escompte. 

The  Comptoir  d'Escompte  had  in  its  general  meeting 
of  December  8,  1866,  raised  its  capital  to  80,000,000  francs 
and  established  a  reserve  fund  of  20,000,000  francs. 

In  1867  it  enlarged  its  sphere  of  action  by  establishing 
new  agencies.  In  France  it  founded  one  at  Nantes  (1867) , 
at  Lyons  (1868),  and  at  Marseilles  (1869).  Abroad  it 
estabHshed  those  at  London  (1867),  Yokohama,  Japan, 
and  Alexandria,  Egypt.  The  Comptoir  had  as  wide  inter- 
ests in  foreign  countries  as  in  France. 

Its  agencies  at  Nantes  and  Marseilles,  both  seaports, 
put  it  in  touch  with  firms  having  business  with  otu*  colo- 
nies, or  with  those  numerous  and  often  rich  firms  which 
had  business  with  Egypt,  India,  and  the  Far  East.  Finally, 
the  agency  at  Lyons  was  very  efficacious  because  of  the 
accommodations  it  gave  silk  merchants  for  extending  in 
that  city  the  silk  market  which  it  had  succeeded  in  wrest- 
ing from  London  a  few  years  before. 

In  1869-70,  on  the  eve  of  the  Franco-Prussian  war, 
the  total  business  of  the  Comptoir  reached  3,086,000,000 
francs,  an  enormous  sum  for  that  time,  and  this  business 
was  made  up  as  follows: 

Francs. 

Discounts __ _ i,  187,000,000 

Foreign  agencies _ __   1,096,000,000 

Home  agencies _ .__ __ 438, 000, 000 

Other  operations... _       365,000,000 

Total _ 3,086,000,000 

The  dividend  that  year  rose  to  9  per  cent. 

123 


N  ational      Monetary      Commission 

We  are  far  from  the  modest  beginnings  of  the  Comp- 
toir;  indeed,  we  have  seen  its  first  capital  formed  Hke  a 
charity  collection,  at  the  most  distressing  time  of  the 
panic  of  1848,  when  it  was  started.  It  had  always  been 
true  to  its  pmpose  of  a  discount  bank,  and  soon  found 
itself  brought  into  business  relations  with  the  most  dis- 
tant foreign  cotmtries.  Circumstances  forced  this,  as,  for 
instance,  the  first  war  with  China  and  the  difficulty  at 
that  time  of  competing  with  the  provincial  banks  which, 
since  the  increase  in  the  number  of  branches  of  the  Bank 
of  France,  fovmd  help  in  this  great  issuing  establishment, 
which  rediscounted  their  commercial  bills  for  them. 
Nevertheless,  in  the  last  period  we  have  gone  over,  it 
founded  agencies  in  the  most  important  French  cities.  It 
is  none  the  less  the  pioneer  in  the  founding  of  foreign 
agencies. 


Chapter  IV. — The  Bank  of  France  from  i860  to  1875. 

Tendency  of  the  Bank  to  have  a  large  cash  reserve.— Unproductive  circulation.— 
Difference  in  the  evolution  of  the  Bank  of  England  and  the  Bank  of  France.— The 
Bank  of  France  gradually  becomes  the  depository  of  French  specie.— Gold  pur- 
chases as  a  means  of  increasing  the  reserve.— The  panic  of  1864.— Its  causes.— 
First  symptoms.— Acute  period  of  the  crisis.— The  Bank  buys  gold.— The  interest 
on  loans  on  securities  becomes  different  from  the  rate  of  discount.— The  law  of 
March  3, 1852,  in  regard  to  loans  on  railroad  securities.— Its  consequences.— Panic 
of  1856-57.— Panic  of  1862-64.— The  interest  on  loans  on  securities  was  the  same  as 
the  discount  rate.— The  Bank  establishes  an  increase  in  interest  on  loans  on  securi- 
ties as  compared  with  the  discount  rate.— The  issue  of  bank  notes  representing 
loans  on  securities.    Dangers  of  its  exaggeration.— Issues  and  discounts  of  the 
Bank  from  1864  to  1870.— Note  on  a  fact  seemingly  paradoxical;  differences  in 
1865-66  of  6  per  cent  between  the  discount  rate  of  the  Bank  of  England  and  the 
Bank  of  France.— The  panic  of  1865-66  in  London  m  its  relation  to  the  Paris  money 
market.— Moral  obligations  of  the  Bank  toward  the  Government.    Its  financial 
help  in  war  time.— Legal  currency  and  forced  currency  (August  12,  1870).— The 
right  to  hicrease  the  issue.— Bank's  loans  to  the  State.— Loan  to  the  city  of  Paris.— 
Precautions  taken  by  the  Bank.— Disadvantages  of  a  state  bank  m  time  of  war.— 
Forced  payments  to  the  Paris  Commune.— Increase  in  discounts.— Services  ren- 
dered by  bank  notes.— Growth  in  economic  activity  after  the  war  of  1870-71.— Col- 
lection of  bills  the  time  of  payment  of  which  had  been  extended.— The  loss  m  the  col- 
lection of  extended  biUs  is  very  small.— Deep  lying  causes  of  commercial  customs.— 
Increase  in  the  Ihnit  of  issue  for  the  Bank  of  France.— FlexibUity  of  the  system 
subject  to  the  intelligent  action  of  the  public  authorities.— Comparisons  with  the 
Bank  of  England.— Terms  of  payment  of  the  war  indemnity.— Method  of  pay- 
ment.—Interest  in  explaining  these  operations.— Secondary  conditions.— Loan  of 
2,000,000,000  francs  in  June,  1871.— Loan  of  3,000,000,000  francs  hi  July,  1872.— 
Success  of  the  loan  of  1872.— Loan  by  the  Bank  of  France  to  the  State.— Agreement 
with  a  syndicate  of  bankers.— France's  progress  hi  the  knowledge  of  the  conditions 
of  credit. 

I. — Before  the  Franco-Prussian  War. 

Let  us  return  to  the  Bank  of  France,  which  we  left  in 
i860  after  its  operations  of  marketing  railroad  securities. 
We  know  that  it  had  already  increased  the  number  of  its 
branch  banks. 

The  following  table  shows  the  development  of  its  op- 
erations; it  will  help  us  on  several  points  to  make  the 
observations  which  certain  figures  call  for;  we  divide  the 
interval  before  the  war  into  periods  of  two  years  each. 


124 


"5 


National      Monetary      Commission 


Evolution     of    Credit    and     Banks 


[MilUon  francs.] 


Year. 


Average 
reserve. 


Average 
circula- 
tion. 


Number 

of  bills 

discounted. 


1859 

1861 

1863 

1864 

186s 

1867 

1869 


570.0 
368.6 
305  o 
252. 1 
439-6 
84s  o 
I,  190.0 


716.4 
745. o 
796.0 


761 

839 
I.  081 

1.354 


3.395.163 
4.  188,471 
4.  280,378 
4,698,437 
4.  734-997 
S, 001, 881 
5.656,600 


Sum 
total  of 
bills  dis- 
counted. 


4.7M 
5.307 
5.  706 
6,546 
6.039 
5.723 
6.635 


Average 
of  com- 
mercial 
"port- 
foHo." 


Rates  of  discoimt. 


Maxi- 
mum. 


484.0 
531-3 
568.7 
635  o 
595.8 

530.7 
568.0 


Percent 
4.5 
7 

7 
8 

5 
3 

2 


Mini- 
mum. 


Per  cent. 
3-0 
5 
3 
3 
3 
2 
2 


w 


We  see  first  of  all  that  the  reserve  has  risen  in  this 
space  of  time  from  368,000,000  to  nearly  1,200,000,000 
francs— that  is,  it  has  more  than  tripled.  The  circula- 
tion of  bank  notes  has  also  increased,  but  has  not  quite 
doubled.  The  discounts  have  not  increased,  as  is  shown 
m  the  column  containing  the  average  total  of  the  com- 
mercial "portfolio,"  which  in  1869  was  the  same  as  in 
1863—568,000,000  francs.  The  notes  in  circulation,  then, 
in  large  part  represent  specie— that  is,  the  reserve. 

If  we  deduct  from  the  average  total  of  circulation  the 
average  total  of  commercial  bills,  we  have  left  786,500,000 
francs,  which  are  an  important  part  of  the  circulation 
representing  specie  and  having  nothing  in  common  with 
the  credit  through  issue;  this  is  called  unproductive  cir- 
culation in  institutions  of  issue.  To  be  sure,  we  must 
take  into  accoimt  advances  on  securities;  but  during 
these  nine  years  the  average  total  of  collateral  loans, 
which  reached  nearly  181,000,000  francs  in  1861  and 
166,000,000  francs  in  1862,  fluctuated  after  that  between 
75,000,000  and  85,000,000  francs. 


It  is  a  strange  thing,  and  at  first  sight  almost  para- 
doxical, that  when  the  very  strict  law  of  1844  forced  the 
Bank  of  England  not  to  issue,  over  and  above  a  certain 
figure,  anything  but  gold  certificates,  the  Bank  of  France, 
without  the  intervention  of  any  law,  but  simply  by  the 
course  of  events  and  the  spirit  of  economy  among  the 
French  people,  saw  this  very  idea  of  the  law  of  1844 
carried  out  without  any  government  interference.  In- 
deed, not  only  were  the  French  as  a  nation  saving  money, 
but  their  savings  flooded  the  money  market  because  they 
were  not  being  used  either  in  industries  at  home  or  in 
the  colonies,  as  was  the  case  at  that  time  in  England. 

To  be  sure,  the  Credit  Mobilier  sent  French  capital  to 
Austria,  Spain,  Russia,  etc.,  to  build  railroads;  in  France, 
too,  the  railroads  had  already  required  several  biUion 
francs  for  their  construction;  but  our  capacity  for  accu- 
mulating capital  gives  us  an  extra  amount  of  cash  capital, 
of  which  the  Bank  of  France  gradually  becomes  the  deposi- 
tory. Aside  from  the  great  and  far-reaching  panic  caused 
by  the  Franco-Prussian  war,  in  proportion  as  the  Bank 
spread  its  influence  through  France  by  means  of  its 
branches  this  phenomenon  took  place  more  and  more. 
The  consequence  was  that  the  Bank  tried  means  different 
from  those  it  had  appUed  before  to  protect  its  reserve. 

In  former  panics  in  1847  and  1855-1857  the  Bank  of 
France  bought  gold  to  keep  up  an  adequate  reserve.  In 
this  last  panic  it  had  recoiurse  to  this  method  to  the  sum 
of  almost  1 ,300,000,000  francs,  purchases  which  cost  it  a 
little  over  i  per  cent.     Henceforth  it  no  longer  needed  to 


126 


127 


■•I 


If 


N  ational      Monetary      Commission 

use  this  method  to  any  extent  except  during  the  panic  of 
1864. 

Where  did  this  panic  start  ?  It  started  in  America.  The 
War  of  Secession  was  the  immediate  cause.  The  panic,  as 
is  always  the  case,  was  first  felt  in  England  because  of  its 
important  relations  with  the  United  States,  and  then  in 
France. 

The  War  of  Secession  greatly  disturbed  the  supply  of 
certain  products  which  Europe  got  from  America.  The 
American  cotton  merchants  called  in  at  the  beginning  of 
the  war  the  money  due  them  and  foimd  themselves 
obliged  to  refuse  the  orders  which  had  been  given  them, 
and  it  was  impossible  for  them  to  deliver  those  which  they 
had  already  accepted.  In  order  not  to  shut  down,  the 
European  factories  had  to  buy  cotton  in  India.  All  this 
caused  great  changes. 

The  beginnings  of  the  panic  were  felt  as  early  as  1861. 
The  preceding  table  shows  that  in  comparison  with  1859 
the  average  reserve  went  down  from  570,000,000  francs 
to  368,600,000  francs;  the  discount  went  to  7  per  cent, 
with  a  minimum  of  5  per  cent.  In  1865  there  was  a  still 
greater  falHng  off  in  the  average  reserve.  It  went  down  to 
305,000,000  francs.  The  minimum  in  November  was  even 
as  low  as  200,000,000  francs.  It  did  not  drop  lower  than 
that  figure  during  the  worst  period  of  the  panic,  but  the 
discount  rate  went  to  7  per  cent,  as  in  1861. 

In  1864  the  panic  was  at  its  worst  at  the  time  of  foreign 
payments,  the  end  of  April  to  May,  and  September  to 
October.  During  the  first  period  the  reserve  fell  below 
160,000,000  francs  in  spite  of  a  rise  in  the  discount  rate  to 


128 


Evolution     of    Credit     and     Banks 

8  per  cent.     In  the  face  of  a  greater  and  greater  number 
of  bills  presented  for  discount,  the  Bank  directors,  because 
of  the  growing  demand  for  coin,  decided  again  to  buy  gold. 
Thus  the  Bank  purchased  gold  abroad  to  the  sum  of  a 
little  less  than  240,000,000  francs.     In  September  and 
October  the  discount  rate,  which  had  been  lowered  for 
some  time,  was  raised  to  7  per  cent,  then  to  8  per  cent, 
with  a  special  view  to  reestablishing  the  reserve.     At  the 
end  of  the  year  the  discount  rate  fell  back  to  4X  per  cent. 
The  Bank  had  been  authorized  since  1834  to  make  ad- 
vances on  securities  to  private  individuals.     Up  to  about 
185 1   these  operations  were  not  very  important,  because 
this  kind  of  securities  was  limited  to  those  of  the  State  or 
of  cities.     From  the  moment  when  the  Bank  could  con- 
sent to  advance  money  on  a  larger  variety  of  certificates — 
that  is  to  say,  transferable  securities — when  it  could  lend 
money  on  stocks  and  bonds  of  railroads,  of  the  Credit 
Foncier,  etc.,  this  side  of  its  business  took  on  large  pro- 
portions.    The  following  table  shows  this  progress.     We 
give  only  five-year  intervals  from  1834  to  1851,  and  after 
that  every  year  up  to  1870: 


Year. 


1834 

1840 

184s - 

X850 : 

x8si __. 

185a 

X853 - 

X8S4 

1971 — lO-^ — 9  129 


Loans  on  securities. 


Total  sums 
advanced. 


Average 
portfolio. 


Francs. 

37,600, 000 

70, 500, 000 

52,300,000 

76, 700.000 

51,900,000 

533*500,000 

773.900,000 

471,400,000 


Francs. 
7, 700,000 
10. 500,000 
II, 300, 000 
18.800, 000 
10, 800, 000 
68,300,000 
139,500,000 
89. 500. 000 


i 


National      Monetary      Commission 


Year. 


Loans  on  securities. 


Total  sums 
advanced. 


Francs. 

185s 671. 700, 000 

1856 - --      83 4.  800 ,  000 

1857 - - 353,600.000 

1858. ---       599.  500.  000 

1859 - I     684,  200,  000 

i860 - - I     651,  600,  oco 

1861 1     472.  500,  000 

1862 II,  303 ,  600,  000 


999. 200. 000 
4*3.300,000 
401, 800, 000 
420. 400, 000 


1863 - - - --- 

1864 -- - - -- 

1865 -. - 

1866 -_- - - - 

1867 - 445.  700,000 

1 868 -- - -      433.  400 ,  000 

1869 480, 000, 000 

1870 — 542.  000,  000 


Average, 
portfolio. 


Francs. 

105,  200, 000 

81, 200, 000 

52, 500, 000 

97, 000, 000 

117, TOO, 000 
122, 800, 000 

88, 200, 000 

180, 600, 000 

166, 100, 000 

84, 200, 000 

74. 000, 000 

77, 400, 000 

85, 800, 000 

84, 100,  000 

94, 200, 000 

121, 600, 000 


Let  us  remark  again  before  drawing  conclusions  from 
these  figures  that  the  law  of  Jime  30,  1840,  had  allowed 
ail  pubHc  seciuities  as  guaranty  for  commercial  bills 
presented  for  discoimt  with  two  signatures. 

First  of  all  we  note  that  in  1852  the  total  loans  for 
the  year  rose  to  523,500,000  francs,  whereas  they  were 
only  51,900,000  francs  in  1851;  in  the  same  way  the 
average  of  the  "portfolio"  went  from  10,800,000  francs 
to  68,300,000  francs.  The  movement  went  on  and 
increased  in  1853.  The  reason  for  this  was  the  law  of 
March  3,  1852,  which  extended  the  loan  operations  of  the 
Bank  to  railroad  stocks  and  bonds,  whereas  by  the 
terms  of  the  law  of  May  17,  1834,  the  Bank  could  make 
loans  only  on  French  government  sectuities.  After 
dropping  in  1854  these  figvues  rose,  and  during  the  panic 
of  1856  reached  almost  835,000,000  francs  for  the  total 

130 


Evolution     of    Credit     and     Banks 

loans  and  81,000,000  francs  for  the  average  during  that 
year.     The  panic  had  caused  a  call  for  loans  to  be  made  by 
the  holders  of  securities  who  needed  cash  capital  or  bank 
notes.     Next  we  see  a  falling  off  in  the  total  and  average 
loans  in  1857,  then  they  went  up  in  1858  and  reached 
a  total  of  nearly  600,000,000  francs  and  an  average  of 
97,000,000  francs.    In  1 862  the  total  of  collateral  loans  went 
up  to  a  figure  unheard  of  till  then,  almost  1,304,000,000 
francs,  and  the  average  to  180,500,000  francs;  the  fol- 
lowing year  we  find  respectively  almost   1,000,000,000 
francs  in  one  column  and  166,000,000  francs  in  the  other; 
it  was  another  panic— the  cotton  panic  brought  about  by 
the  War  of  Secession— which  called  forth  this  demand  for 
cash  or  bank  notes.     It  was  also  the  time  when  the  Credit 
Mobilier  started  out  to  market  railroad  securities.    Every- 
one used  what  means  he  had  to  obtain  credit  and  bor- 
rowed on  securities  when  the  discount  on  commercial  bills 
was  not  enough,  railroad  securities  having  become  very 
numerous  on  account  of  repeated  borrowings. 

Now,  the  Bank  of  France  made  its  loans  at  the  same 
rate  as  that  which  it  fixed  for  discount.  In  view  of  the 
numerous  demands  for  loans  during  these  two  years,  1862 
and  1863,  the  Bank  understood  that  it  was  necessary  to 
establish  a  higher  rate  for  the  interest  on  collateral  loans. 
Its  directors  saw  rather  late  the  usefulness  of  this  measure. 
In  reality,  transferable  securities,  stocks  or  bonds  de- 
posited as  collateral  for  promissory  notes,  are  not  easy 
to  reaHze  on  by  the  depositor  even  when  the  need  is 
urgent.  Too  many  obstacles  prevent  their  being  quickly 
negotiable,  even  assuming  that  the  loan  has  fallen  due. 


131 


% 


National    Monetary    Commission 

It  is  understood  that  the  margin  between  the  market 
quotation  of  the  security  at  the  moment  of  the  loan  and 
the  value  below  the  quotation  which  the  banker  fixes  for 
the  loan,  guaranties  the  banker  against  all  risk  if  this 
margin  has  been  cautiously  worked  out.  But  here  one 
might  say  that  the  sureness  of  the  guaranty  is  in  inverse 
ratio  to  the  availability  of  the  capital  loaned.  Granting, 
then,  that  payment  has  fallen  due,  you  will  call  upon  the 
debtor  to  pay  his  debt.  But  he  may  fail  to  obey  this  call, 
especially  in  a  panic.  Here  you  can  not  use  the  rapid 
methods  of  procedure  thought  out  for  bills  of  commerce. 
It  is  a  collateral  loan,  so  you  have  to  reach  the  point  of 
using  the  right  to  sell  the  collateral.  Now,  selUng  govern- 
ment and  railroad  sectuities,  etc.,  in  time  of  panic,  throw- 
ing great  quantities  of  them  on  the  market,  necessarily 
causes  a  decline  in  these  securities  and  others  of  the  kind 
allowed  as  collateral  on  loans.  To  issue  bank  notes 
against  securities  that  can  not  be  quickly  realized  on  is 
something  a  bank  of  issue  ought  not  to  do  without  cau- 
tion. The  problem  was  new  at  that  time,  and  it  was  only 
the  heavy  loans  of  1862  and  1863  that  began  to  alarm  the 
bank  directors. 

The  method  to  employ  was  simple;  it  consisted  in  rais- 
ing the  interest  on  loans  in  comparison  with  the  discount 
rate.  This  is  what  the  Bank  did.  The  effects  of  this 
measure  were  immediately  felt;  the  total  of  loans  re- 
mained aroimd  400,000,000  to  450,000,000  francs.  Here, 
as  a  document  that  bears  on  this  measure,  is  a  table  of 
the  differences  in  favor  of  discount  demanded  by  the  Bank 
up  to  1870. 


132 


Evolution     of    Credit     and     Banks 

Extra  ifUerest  on  loans  as  compared  with  discount  rate. 
[Discount  rate  and  interest  on  loans  the  same  before  March  24,  1864.] 

Per  cent. 

From  March  24,  1864,  to  May  5,  1864 i 

From  May  6,  1864,  to  May  25,  1864 o 

From  May  26,  1864,  to  September  8,  1864 i 

From  September  9,  1864,  to  November  2,  1864 o 

From  November  3,  1864,  to  March  8,  1865 i 

From  March  9,  1865,  to  May  31,  i865__ ^ 

From  June  i,  1865,  to  October  8,  1865 i 

From  October  9,  1865,  to  November  i,  1871 y^ 

If  we  go  back  now  to  the  table  before  this  one,  we  see 
that  during  the  years  which  follow  the  panic  of  1863-64 
the  metaUic  reserve  rose  by  degrees.  In  1869,  on  the  eve 
of  the  Franco-Prussian  war,  it  rose  on  an  average  to  about 
'  1,190,000,000  francs,  or,  more  precisely,  1,189,800,000 
francs;  the  circulation  of  bank  notes  exceeded  on  the 
average  1,354,000,000  francs.  In  1868,  moreover,  the 
average  reserve  aheady  reached  1,174,000,000  francs, 
and  the  circulation  rose  to  1,233,000,000  francs.  The 
amount  of  the  reserve  almost  equalled  the  circulation. 
The  difference  was  less  than  60,000,000  francs.  But  is 
that  a  sign  of  prosperity?  To  prove  that  this  sign  is 
fallacious  it  suffices  to  follow  the  fluctuations  of  the  fig- 
lu-es  relating  to  discounts  collected  in  the  following  table: 


Year. 

Average 
discounts. 

Average 

rate  of 

discount. 

1856 

Francs. 
493.000,000 
493.300,000 
63s. 000, 000 
595.800,000 
656, 600, 000 
530, 700,000 
458, 500,000 
568,000,000 
738,000,000 

Per  cent. 

i86o_ 

5.51 
3.63 
6.50 

1864 

1865-- 

1866 t 

3-  73 
3.67 

1867 

1868. _ 

2.  71 

1869 

2.50 

1870 

3.  50 

3-99 

133 


f! 


Illi<(* 


♦ 


I 


I 


:im      ' 


National      Monetary       Commission 

Hence  beginning  with  1856,  the  year  when  the  average 
discounts  reached  a  figure  till  then  unknown,  we  see  the 
discounts  rising  in  a  few  years  to  figures  which  fluctuate 
around  600,000,000  francs.  Then  from  1867  this  average 
goes  down  to  only  458,500,000  francs  in  1868;  at  one 
time  even  the  discounts  showed  in  that  year  a  minimum 
of  410,000,000  francs.  The  falling  off  in  business  pre- 
vious to  1870  was  directly  connected  with  fear  for  the 
political  situation  in  Europe.  Since  1866,  since  Sadowa, 
war  was  thought  to  be  probable  between  France  and 
Prussia,  and  this  fear  checked  business  transactions; 
people  did  not  dare  to  invest  capital  in  industrial  concerns. 
You  notice  this  in  looking  over  the  average  balance  of 
individual  current  accounts  at  the  Bank  of  France. 
After  having  exceeded  200,000,000  francs  in  1859  and 
i860,  it  had  fluctuated  from  1861  to  1865  between 
165,000,000  and  185,000,000  francs.  But  from  1866 
it  went  up  as  shown  by  the  following  table: 

Average  balance  of  individual  current  accounts. 

Francs. 

1861 164,  2CX),  000 

1 862 186,  100,  000 

1863 170,  ScK),  000 

1864 - 146,  500,  000 

1865 176,  800,  000 

1 866 267,  600,  000 

1867 311,300,000 

1868 -  407,300,000 

1 869 —  348,  600,  000 

1870 —  402 ,  600,  000 

REMARKS. 

London  experienced  in  1865-66  a  financial  crisis  in  the 
form  of  a  money  shortage,  which  was  one  of  the  most 
severe  that  market  ever  had.  There  were  several  reasons 
for  it;  one  fimdamental  cause  was  the  heavv  demand  for 

134 


Evolution     of    Credit     and     Banks 

gold  in  India;  another  cause  of  weakness  was  in  the 
mechanism  of  the  Bank  of  England,  which,  beyond  its 
loan  to  the  State,  can  not  issue  notes  without  having  their 
value  in  gold  in  its  treastuy;  finally,  an  unprecedented 
public  panic  forced  the  closing  of  the  most  trustworthy 
credit  firms  which  operated  only  in  the  most  conserva- 
tive way,  like  the  joint-stock  banks.  The  curious  thing 
is  that  the  discount  rate  went  up  to  10  per  cent  at  the 
Bank  of  England;  it  stayed  three  months  at  that  level, 
whereas  that  of  the  Bank  of  France  did  not  exceed  4 
per  cent  during  this  period,  and  even  fell  to  3.5  per  cent. 
This  shows  that  gold  was  not  being  exported  to  England 
from  France.  How  can  we  explain  that  these  two  mar- 
kets so  near  to  each  other  should  be  so  little  subject  to 
the  regulative  law  of  supply  and  demand,  while  no 
restrictive  law  in  France  opposed  at  that  time  the  trans- 
portation or  sale  of  gold  to  foreign  coimtries? 

Let  us  retrace  first  the  fluctuations  in  the  discount  rate 
at  the  Bank  of  England  and  the  Bank  of  France  from 
October,  1865,  to  July,  1866. 


Date. 

Discount  rate. 

Bank  of 
England. 

Bank  of 
France. 

1865 — October  2 _ 

Per  cent. 

5 
6 

' 
7 

8 
6 

f 
8 

9 
10 

zo 

Per  cent. 

October  s 

3 

November  12 

4 

December  28. 

5 

1866 — ^January  4 

4 

March  15 

5 

May  3 

J 

Mays 

3 

May  II 

3'  S 

May  I  a . . 

4-  0 

July  16 

4.0 

3.5 

135 


i  I. 


National    Monetary     Commission 


Evolution     of    Credit     and     Banks 


111  I 


ill 


The  reason  for  this  state  of  affairs  seemingly  so  abnor- 
mal is  that  the  panic  of  1866  in  London  was  purely  local. 
The  English  public  greatly  exaggerated  the  shipments  of 
gold  to  India.     Passing  troubles,  which  at  other  times 
would  not  have  been  noticed,  made  depositors  in  certain 
joint-stock  banks  lose  confidence.     The  public  made  a 
mad  rush,  and  the  result  was  that  some  of  these  houses 
suspended   payment.     It   was   a   genuine   panic,    which 
brought  about  what  we  call  to-day  a  run  on  the  bank. 
What  happened  next?    These  joint-stock  banks,  like  all 
London  banks,  helped  to  make  at  the  clearing  house,  for 
their  own  account  and  that  of  their  clients,  compensatory 
payments  and  balancings  of  checks.     These  substitutes 
for  coin  failing  suddenly  so  far  as  these  banks  were  con- 
cerned, a  money  scarcity  followed.     The  machinery  of 
the  clearing  house  is  really  very  delicate  and  sensitive. 
If  it  has  just  sufifered  a  slackening  or  a  sudden  jerk, 
the  whole  mechanism  of  London  credit  is  affected.     So 
the  Bank  of  England  was  called  upon.     Thanks  to  the 
suspension  of  the  act  of  1844,  this  bank  could  issue  an 
extra  allowance  of  notes  amounting  to  £6,000,000,  and 
save  its  situation   by  gradually  raising  the  discotmt  to 
10  per  cent.     Its  reserve,  which  was  £14,000,000,  went 
down  to  only  £11,800,000  on  May  23,  being  a  diminu- 
tion of  £2,200,000.     As  for  London  exchange  on  Paris, 
which  varied  then  from   25.12  to  25.30,  it  went  down 
during  the  worst  of  the  panic  to  25.10.     The  exchange, 
then,  showed  that  it  was  rather  more  advantageous  for 
Paris  to  buy  gold  in  London.     In  reality,  the  10  per  cent 
rate  of  discoimt  maintained  by  the  Bank  of  England  was 


136 


kept  up  perhaps  a  little  longer  than  necessary.  In  any 
case  London's  rate  of  exchange  at  that  time  was  not  dis- 
advantageous relatively  to  Paris  and  other  European 
markets,  such  as  Amsterdam,  Hamburg,  etc.  The  rate 
of  exchange  went  up  only  on  Calcutta. 

At  that  time  the  intercommunication  between  the 
European  money  markets  was  not  as  finely  adjusted  as 
it  is  to-day.  At  the  present  time  and  under  the  same 
conditions  the  rise  in  exchange  would  have  been  momen- 
tary, but  it  would  have  been  felt  just  the  same.  There 
are  sympathetic  crises,  just  as  there  are  sympathetic 
pains,  which  the  delicate  sensitiveness  of  the  organisms 
explains.  Thus  the  crisis  of  1866  had  for  its  chief  cause 
the  pains  aroused  by  a  slightly  abnormal  demand  for  gold 
in  India  and  especially  by  the  increase  in  the  needs  for 
actual  cash  caused  by  the  suspension  of  the  banks  of 
which  we  have  spoken.  On  the  other  hand,  the  other 
European  markets  had  either  a  silver  standard  or  bimet- 
allism; so  it  is  likewise  easy  to  understand  why  they 
thought  so  little  of  protecting  themselves  and  showed 
so  little  anxiety,  since  the  London  panic  in  its  worst 
period  was  characterized  by  a  demand  for  gold.  We 
have  seen  that  this  demand  was  not  very  great,  since 
the  continental  markets  did  not  have  to  export  gold, 
and  the  Bank  of  England  itself  had  only  a  little  over 
£2,000,000  less  than  its  normal  reserve. 

II. — ^Thb  Franco-Prussian  War  and  its  Consequences. 

The  Bank  of  France,  bound  to  the  State  and  holding 
its  privilege  from  the  State,  was  naturally  destined  to 
play  a  very  active  part  in  connection  with  it  during  the 

137 


BB 


li   ill 


II 


niiH 


National    Monetary    Commission 

war.  The  war  that  broke  out  in  July,  1870 — it  was 
declared  by  the  legislative  body  on  the  night  of  July 
14-15 — was  to  show  what  an  important  financial  machine 
this  establishment  was  for  the  Government,  as  well  as 
the  aid  it  was  to  give  it. 

At  the  beginning  of  hostiUties  the  Government  had 
recourse  to  it,  and  as  early  as  July  18  borrowed  50,000,000 
francs. 

On  August  12  a  law  decreed  that  the  notes  of  the  Bank 
should  have  legal  ciurency  and  forced  currency — that  is 
to  say,  that  every  creditor  should  be  obUged  to  accept  the 
notes  instead  of  coin  and  at  the  same  value  as  current 
coin;  and  by  forced  currency  it  is  scarcely  necessary  for 
us  to  explain  that  we  mean  the  right  of  the  Bank  which 
issues  the  notes  not  to  redeem  them  in  specie.  The 
same  law  raised  the  maximum  of  bank-note  issue  to 
1,800,000,000  francs;  then  it  authorized  the  circulation  of 
2 5 -franc  notes. 

On  August  14  the  total  issue  was  increased  to 
2,400,000,000  francs,  and  later  to  2,800,000,000  (Decem- 
ber 29,  1871). 

The  first  defeats  of  the  French  armies  brought  about 
the  fall  of  the  Imperial  Government.  A  provisional  gov- 
ernment formed  by  the  Paris  deputies  followed.  As 
it  was  composed  of  well-known  poUtical  men,  and  as 
prominent  men  of  several  parties  gave  it  their  support 
in  order  to  preserve  domestic  order,  in  the  presence  of  an 
invading  enemy,  the  Government  of  September  4  was 
accepted  and  obeyed.  The  Bank  continued  to  act  in  its 
relations  with  it  as  it  had  toward  the  regular  govern- 
ment. 

138 


|!|!i' 


Evolution     of    Credit     and     Banks 

This  new  Government  sent  a  delegation  into  the  prov- 
inces to  organize  armies.  Most  of  its  members  lived  in 
Paris,  which  was  occupied  a  few  days  later  (September  19, 
1870)  by  the  Germans. 

The  Bank  followed  a  similar  course.  M.  Rouland,  the 
governor,  remained  at  Paris  with  Deputy  Governor  M. 
de  Ploem;  and  M.  Cuvier,  the  other  deputy  governor, 
accompanied  by  M.  O'Quin,  went  to  Tours,  where  the 
delegation  of  the  provisional  government  was  sitting. 

During  this  terrible  period  the  Bank  helped  the  State, 
both  in  Paris  and  in  the  provinces,  by  means  of  loans. 
Here  we  give  the  list : 

Advances  of  the  Bank  of  France  to  the  State  at  the  time  of  the  Franco-Prussian 

war,  iSyo-yi. 

»    .  Francs. 

i870-Julyi8 _         50,000,000 

August  18 50,000,000 

August  19 40.000,000 

September  24 75.000. ooo 

December  5  (Paris) 100,000,000 

December  5  (Tours) 100,000,000 

1871-Januaryii 400,000,000 

March  13 50.000,000 

April  15 ...__ 75,000,000 

May  17 150,000,000 

May  30 90,000,000 

June  10 50,000,000 

Receivers-general  of  Metz  and  Strasburg 30'  000,'  000 

July 210,000,000 

Total « 

xuidi     1,470,000,000 

Almost  1,500,000,000  francs. 

"The  Bank  also  paid  into  the  Treasury  in  1873,  150,000,000  francs  in 
gold.     (Treaty  of  June  2,  1873.) 


139 


I 


Il 


National    Monetary     Commission 

The  interest  on  these  loans  was  fixed  at  first  at  6  per 
cent,  which  was  the  discount  rate  at  that  time.  After 
January  22,  1 871,  the  interest  rate  was  lowered  to  3  per 
cent.  The  guaranties  of  these  loans  were  treasury  notes. 
First  of  all  in  the  treaty  of  January  22,  187 1 ,  it  was  agreed 
between  the  Government  and  the  Bank  that  the  Govern- 
ment should  reimburse  the  sums  loaned  it  out  of  its  first 
available  resources,  either  ordinary  or  extraordinary.  But 
circumstances  were  such  that  these  sums  were  paid  back 
only  at  the  end  of  a  certain  time. 

In  the  same  way  the  Bank  advanced  a  sum  of 
200,000,000  francs  to  the  city  of  Paris  (after  its  surren- 
der on  January  28,  1871)  to  pay  the  war  contribution 
due  according  to  the  terms  of  the  sturender.  This  loan 
which,  together  with  the  expenses  incurred  in  negotiating 
it,  rose  to  210,000,000  francs,  was  arranged  at  the  dis- 
count rate,  and  the  sum  was  to  be  redeemed  by  the  city 
of  Paris  in  six  months.  This  debt  was  really  cancelled 
only  in  1875. 

These  facts  show  that  the  Bank  was  able  to  play  its 
part  in  these  difficult  times  and  to  act  effectively  to  help 
the  public  authorities  in  the  hard  and  painful  task  they 
had  to  perform. 

As  a  precautionary  measure,  as  soon  as  the  occupation 
of  Paris  was  feared,  the  Bank  had  sent  to  the  provinces 
part  of  its  cash,  the  plates  for  the  bank  notes,  and  the 
new  notes  in  a  great  many  boxes  which  were  labeled  in 
such  a  way  as  to  disguise  their  contents.  This  measure 
was  far  from  being  useless,  both  against  the  foreign  enemy 


Evolution     of    Credit     and     Banks 

and  the  domestic  mob.  The  foreign  enemy,  it  is  true, 
could  not,  because  of  the  private  character  of  the  Bank, 
consider  its  wealth  as  spoils  of  war,  without  trampling 
under  foot  international  law.  The  case  would  have  been 
entirely  different  had  the  Bank  been  a  State  bank.  This 
is  an  advantage  not  to  be  neglected,  and  it  is  not  taken 
into  account  often  enough  when  the  other  numerous 
and  certain  disadvantages  of  a  state  bank  are  being 
enumerated. 

As  to  the  insurrection  which  broke  out  in  Paris  on 
March  18,  1871,  which  set  up  a  government  called  the 
"Commune  of  Paris,"  it  turned  for  financial  help  to  the 
Bank.  It  was  only  because  they  were  forced  and  con- 
strained that  the  Bank  directors,  living  then  in  Paris, 
gave  successively  several  million  francs  to  the  delegates 
of  the  finances  of  the  commune.  The  sum  thus  turned 
over  reached  16,000,000  francs.  The  city  of  Paris  then 
had  a  credit  of  9,400,000  francs  at  the  Bank.  In  the 
end  the  State  and  the  city  of  Paris  made  themselves 
responsible  for  a  part  of  the  amoimt,  and  the  Bank  had 
to  charge  the  rest  to  profit  and  loss.  At  any  rate  the 
Bank  should  consider  itself  rarely  fortunate  in  not  having 
been  systematically  looted  by  the  insurrectional  govern- 
ment of  the  commune. 

But  these  are  abnormal  conditions  and  not  to  be  too 
much  insisted  on.  They  must  simply  be  taken  into 
account  for  the  moral  prestige  which  they  gave  the  Bank 
and  which  it  deserved  in  this  circumstance 


it 


140 


141 


N  ational      Monetary       Commission 


Evolution     of    Credit     and     Banks 


J  I 


IP 


}f\ 


I 
I 


Let  us  now  review  as  a  whole  the  operations  of  this 
institution  during  the  "terrible  year."  To  do  this  we 
need  only  give  the  figures  of  the  chief  accounts  during  the 
critical  years;  that  is,  until  1874,  when  the  reserve  at  the 
Bank  went  back  to  its  average  figiwe  before  the  war. 
This  table  will  also  help  us  to  explain  the  panic  of  1873. 
In  this  period,  too,  the  large  war  loans  of  June,  1871,  and 
July,  1872,  were  made. 


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142 


143 


National      Monetary      Commission 

The  two  columns  of  the  sum  total  of  discounts  and  of 
average  discounts  clearly  show  the  role  in  j&nancial  and 
economic  credit  which  the  Bank  then  fulfilled.  Before 
1870,  and  during  1870  even  (for  the  first  quarter) ,  the  sum 
total  of  discoimts  fluctuates  between  6,000,000,000  and 
6,500,000,000  francs;  the  average  of  discounts  fluctuates 
around  500,000,000  to  600,000,000  francs.  After  1870 
the  sum  total  of  discounts  increased  and  reached  over 
14,500,000,000  francs  in  1873  (^^  panic  year) ,  and  naturally, 
too,  the  average  discounts  rose  in  the  same  proportions 
and  attained  to  almost  2,300,000,000  francs  in  1873.  ^^^ 
average  reserve  went  down  on  the  contrary;  in  1871  it  was 
half  what  it  was  in  1870.  It  reached  the  figure  it  attained 
before  the  war  only  in  1874.  ^^^  i^  contrast  to  it,  the 
circulation  made  rather  rapid  progress;  in  1872  it  reached 
2,400,000,000  francs.  This  same  year  (1872)  the  law  of 
July  1 5  authorized  the  Bank  to  raise  its  maximum  of  issue 
to  3,200,000,000  francs.  That  was  a  useful  measure,  be- 
cause in  1873  the  preceding  limit  of  2,800,000,000  francs 
was  found  to  be  surpassed  by  the  average  amoimt  of  cir- 
culation. During  these  difficult  years  the  issue  of  bank 
notes  rendered  great  services  both  as  a  monetary  measure, 
properly  so  called,  and  as  a  means  of  discount: 

As  a  monetary  meastue  in  that  the  Bank  had  been 
authorized  by  the  law  of  August  12,  1870,  to  issue  25-franc 
notes,  and  later  by  the  law  of  December  29,  1871,  to  issue 
10  and  5-franc  notes.  We  were  no  longer  at  a  time 
when  in  the  midst  of  a  panic — as  in  1847-48 — ^the  Bank 
was  afraid  of  issuing  50-franc  notes.  These  notes  cir- 
culated without  difficulty;  at  the  beginning  of  the  war, 


Evolution     of    Credit     and     Banks 

it  is  true,  when  the  law  of  August  14,  1870,  raised  the 
maximum  issue  of  the  Bank  to  2,400,000,000,  there  was 
indeed  a  difference  of  15  per  cent  between  the  notes  and 
coin,  but  that  was  not  for  long.  The  loss  of  the  note  in 
comparison  with  gold  quickly  fell  to  i  and  even  one-half 
per  cent.  In  reahty  these  notes,  especially  those  of  small 
denominations — 25,  20,  10,  and  5  francs — always  circu- 
lated at  their  face  value. 

The  increase  in  discount  is  explained,  moreover,  by  the 
great  activity  in  economic  production  which  followed  the 
war.  France  had  not  lost  her  vitality.  She  had  suffered 
trials.  Much  capital  had  been  destroyed  in  unproductive 
ways.  She  had  to  fill  up  the  void.  It  is  a  sort  of  natural 
law  of  upbuilding  which  acts  on  occasions  like  this  for 
social  organisms  which  are  still  healthy,  just  as  it  does 
for  physical  organisms. 

The  following  table  shows  the  progress  of  our  foreign 
commerce  during  these  years.  It  has  to  do  with  special 
commerce. 

[Million  francs.] 


1870. 
1871. 
1872. 
1873- 
1874- 


Imports. 

Exports. 

2,867.4 

3,802.0 

3.566.7 

2.872.5 

'     3.570.3 

3.761.6 

3.554.8 

3.787.3 

3.507.1 

3.7040 

Total. 


5.669.0 
6.439.2 
7.331.9 
7.342.1 
7.  208. 1 


This  growth  in  our  foreign  commerce,  which  in  1873  was 
nearly  1,700,000,000  in  comparison  with  1870  (a  year 
which  shows  about  the  average  of  the  ten  preceding 
years) ,  is  all  the  more  significant  in  that  France  had  lost 
Alsace-Lorraine,  and  with  Alsace  some  very  important 
industrial  centers. 


144 


1971 — 10- 


-10 


145 


» 


National      Monetary      Commission 

This  commercial  progress,  together  with  the  investment 
of  French  capital  abroad  (making  France  a  creditor  of 
many  foreign  countries  for  the  interest  on  very  large 
sums),  explains  how  it  was  possible  to  meet  the  war 
indemnity  of  5,000,000,000  francs  without  paying  more 
than  a  small  balance  in  actual  coin  and  without  depriv- 
ing the  country  of  specie. 

The  market  at  home  was  not  less  active  than  foreign 
trade;  the  discoimts  of  the  Bank  are  an  evidence  of  this. 
In  spite  of  the  terrible  crisis  the  country  had  passed 
through  credit  was  not  affected  a  single  instant.  An 
example  of  this  is  in  the  Bank's  almost  complete  collec- 
tion of  the  commercial  bills,  the  time  of  payment  on 
which  had  been  extended,  and  which  in  the  provinces, 
as  well  as  in  Paris,  amounted  to  a  total  of  nearly 
900,000,000  francs.  The  extending  of  the  time  of  pay- 
ment had  been  a  necessity.  When  France  was  invaded 
by  the  enemy,  when  all  able-bodied  men  were  in  the 
army,  during  the  months  when  Paris  was  occupied,  trade 
and  industries  concentrated  all  their  efforts  in  providing 
for  everybody  in  general  and  for  the  troops  in  particular. 
So  payments  had  to  be  postponed,  and  laws  and  decrees 
were  made  to  extend  the  rights  of  creditors  up  to  the 
ist  of  July,  1 87 1.  The  Bank  of  France  seemed  des- 
tined to  be  affected  by  these  measures  and  to  run  the 
risk  of  heavy  losses.  The  commercial  bills,  which  were 
part  of  its  "portfolio,"  and  payment  of  which  was  ex- 
tended from  August  13,  1870,  to  July  12,  1871,  amounted 
in  Paris  to  630,000,000  and  in  the  provinces  to  238,760,000 
francs. 


146 


Evolution     of    Credit 

and     Banks 

At  Paris. 

In  the 
provinces. 

Repayments  made  before  the  expiration  of  the  last  ex- 
tension.   

361, 000, 000 

234.673,500 

Remaining  due  with  additions  in  1872 

273.312.000 
266,520,000 

Repayments  in  1872 

3. 549. 500 

Remaining  to  be  collected ._   _ 

6, 792,000 

722, 500 

There  were  other  additions  in  1873  and  in  1874,  but  in 
the  end  the  Bank  lost  not  more  than  7,000,000  of  the 
868,000,000  francs  of  bills  on  which  the  time  of  payment 
had  been  extended.  That  represents  a  loss  of  about  0.8 
per  cent  which,  under  the  circumstances,  was  very  small. 

Assuredly  it  is  well  to  note  that  the  Bank  of  France 
discounts  only  first-class  paper,  with  three  signatures,  or 
two  signatures  with  collateral  security.  Many  of  its 
commercial  bills  were  bills  rediscounted  for  bankers. 
Still,  in  view  of  the  disasters  France  had  then  suffered,  it 
is  evident  that  the  sHght  loss  in  discounts  shows  strict 
regard  for  meeting  payments  in  commercial  and  industrial 
circles.  Discount,  moreover,  in  France  is  always  a  very 
safe  banking  operation,  provided  it  is  carefully  watched. 
The  material  for  discoimt  is  good;  as  a  result  of  the  qual- 
ities of  prudence  inherent  in  the  character  of  the  people, 
even  the  smallest  shopkeepers  are  mindful  of  the  bills  they 
have  to  meet  and  honor  them. 

The  Bank  of  France — thanks  to  the  successive  extension 
of  its  right  of  issue  to  1,800,000,000  francs,  then  to 
2,400,000,000  francs,  soon  after  to  2,800,000,000,  and 
finally  to  3,200,000,000  francs  in  July,  1872 — was  able  to 
meet  the  monetary  situation  and  the  needs  of  credit. 

147 


II 


i 


'* 


Ill 


II « 


* 


National      Monetary      Commission 

The  Government  has  never  hesitated  any  more  than  the 
chambers  to  raise  the  Hmit  of  issue  higher  and  higher.  We 
may  even  ask  what  is  the  use  of  this  legislative  restriction 
on  the  maximun  of  issue.  In  any  case  as  needs  arise, 
the  Bank  has  been  able  to  fulfil  its  function  of  relieving 
commercial  discounts  by  its  notes  whenever  necessary. 
Placed  under  the  same  conditions,  the  Bank  of  England, 
saddled  with  the  law  of  1844,  could  not  have  rendered 
such  services  as  has  the  Bank  of  France.  It  is  true  that 
in  times  of  panic  in  London  they  do  not  hesitate  to  loosen 
the  shackles  which  Robert  Peel  so  unfortunately  forged, 
and  so  there  comes  about  the  curious  paradox  that  the 
law  of  1844,  established  to  safeguard  the  Bank  of  England 
in  times  of  panic,  becomes  during  those  very  panics  an 
awkward  check,  from  which  the  Bank  is  provisionally 
freed  only  to  have  the  check  put  on  again  when  times  are 
normal  and  there  is  no  use  for  it. 

We  can  see  by  examining  the  table  inserted  above,  in 
which  are  given  the  average  totals  for  the  principal 
accounts  of  the  Bank,  that  the  discount  rate  constantly 
rose  from  the  last  months  of  1870  to  1874.  ^^  its  maxi- 
mum did  not  rise  above  6  per  cent,  its  minimum  did  not 
go  lower  than  5  per  cent  dining  the  years  1871  and  1872. 
In  1873,  because  of  the  crisis  that  took  place  at  this  time, 
the  maximum  discount  rate  exceeded  7  per  cent.  The 
fact  to  note  here  is  that  during  the  foiu*  years  from  1871 
on,  the  average  discount  rate  did  not  go  below  4  per  cent. 
Now,  in  the  years  preceding  the  war  of  1870-71,  we  must 
go  back  to  1864,  a  year  of  acute  panic,  to  find  an  average 
higher  than  4  per  cent.     The  result  is  that  from  1871  to 


148 


Evolution     of    Credit     and     Banks 

1874,  inclusive,  the  dividends  sent  out  to  shareholders  of 
the  Bank  reached  figures  unknown  till  then. 

Here  is  a  table  giving  the  average  rate  of  discount 
and  the  net  dividend  per  share.  It  allows  us  to  make 
a  rapid  comparison. 


Average 

discount 

rate. 

Net 
dividend. 

Percent. 

Francs. 

552 

147 

3-77 

1S» 

4.64 

x6s 

6.50 

23s 

3-7» 

154 

3.67 

156 

2.71 

107 

2.  so 

90 

2.50 

Z07 

3-99 

u 

5. 71 

300 

5- IS 

3»o 

S-2S 

3SO 

4- 30 

28s 

4.00 

300 

3.40 

X45 

2.28 

95 

2.18 

9S 

2.S8 

xxo 

2.81 

ISO 

Only  superficial  minds  could  be  astonished  at  the 
contrast  between  the  large  profits  realized  by  the  Bank 
in  panic  times  and  the  general  depression  which  panic 
creates.  The  Bank,  a  house  of  refuge  for  credit,  pro- 
vided with  the  right  of  issue,  but  having  to  safeguard 
the  underlying  supply  of  available  funds  constituted  by 
its  metalHc  reserve,  intervenes,  to  be  sure,  in  panics  when 
the  case  is  urgent.  Automatically  it  gets  its  services 
paid  for  through  the  necessity  of  protecting  its  reserve. 

149 


I 


IN 


{Hi 


National      Monetary       Commission 

When  the  cause  of  the  panic  is  a  long  and  costly  war 
like  that  of  1870-71;  when  people  dread  very  serious, 
imf oreseen  events  (and  they  happened  in  this  case) ,  the 
Bank  with  the  sole  right  of  issue  must  use  but  not  abuse 
its  privilege.  This  is  what  the  Bank  did  in  1870-71 
and  1872.  It  covered  the  risk  of  having  its  reserve 
depleted,  and  the  risk  which  the  extensions  of  payments 
on  bills  might  have  brought  about,  by  keeping  its  rate 
of  discount  at  an  average  rate,  which  does  not  seem  to 
have  been  too  high,  given  the  average  rate  of  interest 
on  money  at  that  time.  So  there  is  no  occasion  to  be 
surprised  at  the  large  dividends  of  the  years  1871,  1872, 
and  1873.  Do  we  reproach  doctors  and  apothecaries  with 
making  more  profits  in  tunes  of  an  epidemic  than  in 
normal  times? 

III. — The   Large   Loans  and  the   Payment  of  the 

War  Indemnity. 

When  the  preliminaries  of  peace  were  signed  at  Ver- 
sailles in  February,  1871,  it  was  stipulated  that  France 
should  pay  Germany  a  war  indemnity  of  5,000,000,000 
francs.  In  article  7  of  the  treaty  of  Frankfort  (May  10, 
1 871)  the  payment  of  this  indemnity  was  arranged  on 
the  following  terms: 

Francs. 

Thirty  days  after  order  is  reestablished  in  Paris 50x5,  ocx),  000 

During  the  year  1871 i ,  000,  000!  cxx> 

May  I,  1872 500,  OCX),  OCX) 

March  2,  1874 3,  ocx),  ocx),  cxx) 

Total _ __  5, 000,  OCX),  000 

Besides  this  the  French  Government  had  to  pay  on 
March  3  every  year  interest  at  5  per  cent  on  the  last 
3,000,000,000  francs,  and  at  the  same  time  it  could  (by 

150 


Evolution     of    Credit     and     Banks 

giving  three  months'  notice)  make  advance  payments 
on  the  final  payment  due  March  2,  1874. 

As  to  the  method  of  payment,  it  could  be  paid  in  gold  or 
silver,  in  bank  notes  of  the  Bank  of  England,  the  Bank 
of  Prussia,  the  Royal  Bank  of  the  Netherlands,  the 
National  Bank  of  Belgium,  in  bills  to  order,  or  in  nego- 
tiable bills  of  exchange  of  the  highest  character  for  the 
full  cash  value  on  these  same  countries. 

Here  we  have  to  do  with  banking  operations,  real  bank- 
ing operations,  the  foundations  of  which  are  both  the 
pubUc  credit,  regarding  the  money  borrowed  by  the  State 
to  pay  off  its  debt,  and  private  credit,  taking  into  account 
the  situation  of  France  in  this  respect  both  with  refer- 
ence to  the  domestic  and  the  foreign  money  markets. 
It  seems  to  us  that,  in  a  treatise  of  this  kind  on  the 
evolution  of  credit  and  credit  institutions  in  France,  all 
these  operations  should  be  reviewed  in  their  essential 

points. 

The  exchange  for  the  thaler  was  fixed  at  3.75  francs; 
that  of  the  German  florin  at  2.15  francs.  It  was  also 
arranged,  after  the  treaty  of  May  10,  that  125,000,000 
francs  could  be  paid  in  notes  on  the  Bank  of  France; 
then  it  was  agreed  that  98,400  francs  still  owed  by  Ger- 
many to  the  city  of  Paris  on  the  accounts  of  the  payments 
made  by  Paris  on  the  200,000,000  francs  of  the  war  in- 
demnity should  be  carried  over  to  the  accotmt  of  the 
French  Government.  Part  of  the  railroad  system  of  the 
East  comprised  in  the  annexed  provinces  having  been  given 
to  Germany  for  the  price  of  325,000,000  francs,  this  sum 
was  also  to  be  deducted  from  the   5,000,000,000  francs. 


151 


I  I 


I 


N  ational      Monetary      Commission 

The  French  Goverament  remained   in  debt  to  the  com- 
pany for  that  sum. 

The  final  amount  to  be  paid  to  Germany  may  be  shown 
thus: 

Francs. 

War  indemnity 5,000,000,000 

Payments  made  on  account:  Francs. 

Railroad  Company  of  the  East 325,000,000 

City  of  Paris 98,400 

325,  098,  400 
Payments  made  in  notes  of  the  Bank  of 

France 125,  000,  000 

450,  098,  400 

DiflFerence 4,549,901,600 

These  4,549,901,600  francs  had  then  to  be  paid  in  Ger- 
man money  in  a  certain  number  of  payments;  that  meant 
that  the  payments  made  in  Enghsh  or  Dutch  money  had 
to  be  converted  into  German  money.  The  exchange 
therefore  fell  upon  the  French  Government.  We  have 
been  deahng  as  yet  only  with  the  principal.  We  must  add 
the  interest,  which  was  301,145,078  francs,  and  this,  added 
to  the  capital  stated  above,  made  a  total  of  4,851,046,678 
francs. 

On  this  basis  let  us  give  the  results  of  the  two  loans  made 
by  the  French  Government  to  pay  the  indemnity. 

The  first  was  authorized  by  the  law  of  Jtme  20,  1871. 
It  was  made  in  government  5  percents  and  by  pubUc 
subscriptions.     The  price  of  issue  was  82.50  francs. 

Whereas  the  State  asked  for  subscription  to  134,000,000 
francs  of  rentes,  representing  an  actual  capital  of 
2,000,000,000  francs,  296,821,760  francs  of  rentes  (or 
nearly  297,000,000)  were  actually  subscribed  for,  repre- 
senting a  capital  of  4,897,500,000  francs.     Please  note 

r 

152 


Evolution     of    Credit     and     Banks 

that  this  result  was  obtained  in  June,  1 871,  not  long  after 
the  civil  war,  and  while  the  monuments  of  Paris  were 
still  smoking  from  the  fires  set  by  the  insurgents  of  the 
commime. 

About  a  year  later  another  loan  was  authorized  by  the 
law  of  July  15,  1872.  The  amount  was  for  3,000,000,000 
francs  at  5  per  cent.  It  was  issued  at  84.50  francs.  The 
success  was  much  greater  than  that  of  the  first  loan,  the 
results  of  which  had  smrprised  more  than  one  experienced 
financier. 

By  the  loan  of  July,  1872,  France  asked  the  public  to 
subscribe  for  207,026,310  francs  of  rentes.  The  sub- 
scribers called  for  the  tremendous  sum  of  2,592,668,435 
francs  (almost  2,600,000,000  francs),  which  represented 
a  capital  of  nearly  44,000,000,000  francs.  The  share 
of  foreign  coimtries  in  this  enormous  total  was  more 
than  26,000,000,000  francs;  France's  share  about 
18,000,000,000  francs. 

To  be  sure  we  must  take  into  account  here  the  inflation 
of  subscriptions  through  fear  of  having  them  cut  down. 
Already  in  the  case  of  the  first  loan  subscriptions  had  been 
cut  down  more  than  half.  Still,  while  making  allow- 
ances for  this  inflation,  it  is  none  the  less  true  that  the 
anticipation  which  gave  rise  to  it  showed  what  confidence 
financiers  in  all  countries  and  the  pubUc  in  general  had 
in  the  solvency  and  credit  of  France. 

Now  the  reason  why  France  had  good  public  credit 
was  because  its  private  credit — ^bank  credit — ^had  remained 
so  good;  and  because  in  a  few  months  the  country  had  re- 
acted with  steady,  vigorous,  economic  activity  against  the 


153 


V(  \ 


n 


I 


i 


I 


II 


IM« 


National      Monetary       Commission 

disasters  it  had  suffered.  This  was  shown  in  its  foreign 
trade  and  the  receipt  of  taxes. 

The  first  loan  produced  2,225,000,000  francs;  and  out 
of  this  sum  1,561,000,000  (or  70  per  cent)  were  turned  in 
to  pay  the  war  indemnity. 

The  second  loan — of  course,  after  the  cutting  down  of 
subscriptions — produced  3,500,000,000  francs,  of  which 
3,002,000,000  francs  were  used  in  payment  to  Germany — 
that  is,  87  per  cent  of  this  loan. 

The  principal  of  the  indemnity  was  paid  by  these  two 
loans  as  well  as  the  expenses,  which  amounted  to  a  little 
more  than  14,500,000  francs.  As  to  the  interest,  that 
was  deducted  from  the  general  funds  of  the  budget.  We 
are  going  to  enter  into  some  explanations  relating  to  the 
operations  brought  about  by  these  payments;  but  first 
of  all  we  must  review  in  a  comprehensive  table  the 
categories  of  payments,  which  are  three  in  number.  It 
will  then  be  easier  to  understand  how  France  prevented 
a  large  amount  of  specie  from  leaving  the  country,  and 
how  it  reduced  the  payments  of  this  kind  to  a  very 
small  sum. 

method  of  paying  the  war  indemnity.  o 
First  Category. 

compensations. 

Money  in  account  with  the  Railroad  Company  of  the 

East __ — .__  325,000,000 

Money  in  acco'ont  with  city  of  Paris. ___ 98,400 

Total  first  category 325,098,400 

o  The  payments  which  were  to  have  been  made  during  187 1,  then  May  i, 
1873,  then  March  2,  1874 — as  we  have  said  above — were  completed  before 
that  date;  the  deposits  for  the  payment  of  the  last  3,000,000,000  francs 
were  made  between  August  29,  1872,  and  September  5,  1873. 

154 


Evolution     of    Credit     and     Banks 

Second  Category. 

BANK   notes;    GERMAN    COIN;    SPECIE. 

Francs. 

Bank  of  France  notes. 125,000,000.00 

German  notes  and  coin,  brought  in  by  the  invasion 105, 039,  145.  18 

French  gold  coin 273,003,058.10 

French  silver  coin 239,291,875.75 

Total  second  category 742,334.079.03 

Third  Category. 

I^ETTERS   of   exchange. 

German  funds  in  discharge  of  indebtedness 2,  799,  514,  183.  72 

Funds  other  than  German,  including  the  marks  banco,   i,  448,  812,  190.  54 

Total  third  category - 4,  248,  326,  374.  26 

General  total  of  three  categories 5.  3i5,  758,  853.  29 

As  we  see,  out  of  this  enormous  sum  of  more  than 
5,315,000,000  francs  only  a  little  more  than  378,000,000 
francs  were  paid  in  French  coin.  And  in  reality  only 
275,000,000  francs  in  French  coin  left  our  territory  <»  directly 
for  the  indemnity,  for  France  bought  93,000,000  francs 
worth  of  silver  bars  from  the  reserve  of  the  Hamburg  Bank 
and  had  them  minted  in  France.  These  378 ,000,000  francs 
were  paid  in  gold  pieces  and  silver  coined  in  20,  10,  and 
5-franc  pieces.  You  will  notice  that  the  number  in 
question  is  not  an  exact  multiple  of  five.  This  anomaly  is 
explained  by  the  fact  that  in  this  figure  are  counted  the 
prices  of  the  money  bags  and  sacks.  ^ 

The  operation  was  conducted  with  skill  and  good  judg- 
ment. It  would  have  been  difficult  to  avoid  a  monetary 
crisis  in  France  if  the  method  of  payment  of  the  third 

o  We  shall  see  later  that  this  operation  caused  nevertheless  some  rather 
heavy  gold  exports. 

6  The  price  of  the  money  bags  was  fixed  at  o.io  franc,  and  that  of  the 
sacks  at  1.65  francs. 

155 


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mmtsston 


if 


I 


category  had  not  been  resorted  to.  Such  a  crisis  would 
have  been  especially  fatal  to  trade  since  at  that  time  dis- 
counts were  increasing  in  very  large  proportions.  At  this 
point  we  shall  recall  the  average  figures  for  the  years 
1871-72  and  1873  of  the  reserve,  the  notes  in  circulation, 
and  the  discounts  of  the  Bank  of  France. 

[Million  francs.] 


Year. 

Average 
reserve. 

Average 
of  circu- 
lation. 

Average 
of  com- 
mercial 
discounts. 

1871 _ 

SSI-S 

728.1 
762.8 

2,075-2 
2,  400. 8 
2,856.6 

1872 

1, 164.0 

1873 

2,089.4 

2,299.4 

In  regard  to  gold,  a  few  purchases  were  made  on  the 
spot  so  successfully  that  the  figure  of  275,000,000  francs 
indicated  above  has  to  be  cut  down  again.  Barely 
250,000,000  francs  were  taken  out  of  active  circulation  in 
France. 

On  this  occasion  the  Bank  of  France  by  an  agreement 
of  May,  1873,  lent  150,000,000  francs  in  gold  to  the  State, 
which  formed  the  greater  part  of  the  sum  paid  in  gold. 

It  was  not  the  payment  itself  of  the  indemnity  which  at 
this  time  made  France  lose  a  part  of  her  metallic  stock,  a 
part  which  seems  to  have  far  exceeded  the  sum  of  250,. 
000,000  francs.  But  we  shall  see  that  by  its  rebound  the 
payment  of  the  indemnity  mdirectly  caused  gold  to  leave 
the  country. 

The  third  category  of  methods  of  payment  is  the  most 
interesting,  because  it  touches  most  closely  commercial 
credit  and  banking  operations.  The  method  adopted  was 
simple;  it  is  the  one  any  bank  or  merchant  would  have 

156 


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Evolution     of    Credit     and     Banks 

i 

followed  in  paying  a  debt  contracted  with  a  foreigner. 
Moreover,  the  Government  from  the  start  was  beset  with 
bankers  and  dealers  in  exchange,  who  came  and  offered 
foreign  paper.  France  sent  as  much  capital  as  possible 
abroad  by  buying  all  paper  for  exchange,  and  all  the  pos- 
sible bills  it  could  get,  no  matter  on  what  country.  Then 
as  soon  as  the  capital  was  collected  in  the  form  of  these 
foreign  bills,  it  sent  them  to  Germany.  For  the  first 
2,000,000,000  francs  Germany  had  the  English,  Dutch, 
and  other  foreign  paper  converted  into  German  paper  at 
France's  expense.  France  finding  the  cost  of  exchange 
too  high — it  was  more  than  1 1 ,000,000  francs — took  this 
business  upon  itself  and  gained  by  it.  This  conversion  was 
made  easily  enough  at  London,  because  Germany  at  that 
time  was  in  debt  to  England  for  loans  made  during  the 
war  in  the  form  of  short-term  notes,  and  also  for  supplies. 
The  number  of  foreign  bills  obtained  by  the  French 
Government  rose  to  more  than  1 20,000.  To  find  so  many 
bills  three  means  were  used: 

1.  The  payment  in  foreign  funds  of  subscriptions  made 
in  France  as  well  as  of  the  anticipatory  payments  made 
at  home  or  abroad  was  encouraged  by  the  loans  of 
2,000,000,000  and  3,000,000,000  francs. 

2.  The  second  means  consisted  in  an  arrangement  which 
was  made  at  the  time  of  the  borrowing  of  3,000,000,000 
francs  from  several  banking  houses:  an  exchange  opera- 
tion^ was  combined  with  the  underwriting  of  the  subscrip- 

v;i'tioii*to  the  lo^n  by  these  banking  houses. 

3.  The  third  means  was  to  buy  foreign  bills  directly  on 
the  market. 


157 


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! 


National      Monetary      Co 


mmtsston 


The  first  means  (payment  of  the  loan  subscriptions  in 
foreign  funds)  gave  the  treasury  a  very  large  sum,  viz, 
1,773,000,000  francs. 

The  second  method  rested  on  the  following  agreement : 
As  in  the  case  of  the  loan  of  2,000,000,000  francs  the  Gov- 
ernment turned  to  large  banking  houses  which  would  have 
been  able,  unassisted,  to  underwrite  the  loan.  This  was  a 
useless  precaution,  as  we  have  seen;  however,  in  such 
troublous  times  and  in  spite  of  the  success  of  the  first 
loan,  recourse  was  had  for  the  second  loan  to  a  group  of 
bankers.  In  the  agreement  signed  with  them  it  was 
stipulated  that  they  should  furnish  700,000,000  francs  in 
foreign  paper,  which  allowed  them  to  receive  a  rather 
large  commission.  It  was  also  a  way  of  interesting  these 
houses  m  the  rate  of  exchange,  since  they  had  to  buy  ex- 
change, and  would  not,  therefore,  force  the  price  up.  Fifty- 
five  banking  houses  belonging  to  all  countries,  some  of  which 
were  representing  other  houses,  signed  this  agreement. 

The  first  and  second  methods  brought  into  the  treasury 
2,473,000,000  francs  in  foreign  exchange.  So  i  ,775,000,000 
francs  remained  to  complete  the  figtires  given  above. 

This  last  sum  was  procured  by  the  third  method, 
namely,  direct  purchase  by  the  Government. 

When  we  go  to  the  bottom  of  the  matter,  we  see  that 
what  faciUtated  these  operations  was  the  confidence  which 
the  world  at  large  had  in  France,  a  country  rich  in 
capital,  whose  activity  since  the  war  was  a  sign  of  great 
vitality  and  productive  power. 

This  is  the  place  to  remark  on  the  export  of  gold 
indirectly  caused  by  the  payment  of  the  indemnity.  In 
selling  all  the  foreign  paper  they  could  to  the  French 


158 


Evolution     of    Credit     and     Banks 

Treasury,  the  bankers  were  creating  a  scarcity  of  avail- 
able French  effects  on  foreign  markets;  the  result  was 
that  those  who  owed  money  abroad  were  obliged  to  pay 
by  sending  gold,  because  exchange  having  been  sold  to 
this  large  new  cHent,  the  State,  had  become  very  dear. 

It  is  not  for  us  to  dwell  at  this  point  on  the  arbitrage 
"operations  that  the  Government  encouraged  between  cer- 
tificates of  rentes  that  were  fully  paid  up  and  those  that 
were  not;  facts  of  this  sort  do  not  enter  into  the  special 
discussion  of  banking  operations  that  we  are  engaged  in 
here. 

A  few  quotations  of  exchange  on  London — London 
exchange  being  the  best  index  in  judging  money  strin- 
gency— will  show  the  fluctuations  which  our  metallic 
stock  underwent  as  a  result  of  these  operations: 

Paris  exchange  on  London. 

Francs. 

1871 — June  27 -  25.22 

September  26 -- 1 25.45 

October  17 - 26.  18^ 

December  26 25.  73 

March  26 _ 25.  26 

November  12 -- 25.  68>^ 

March  4 25.33 

June  io_-- - - 25.57K 

The  quotations  given  here  are  the  highest  and  lowest 
reached  during  this  period. 

The  average  price  of  government  purchases  on  London 
was  25.494  francs.  The  highest  price  quoted  on  London 
was  26.i8J^  francs  gold,  and  the  price  of  26  francs  was 
kept  up  for  two  months.  From  the  close  of  the  year  1872 
exchange  became  more  normal.  This  was  a  result  of  the 
agreement  made  with  the  syndicate  of  bankers. 


159 


jiiii 


I 


Ini! 


II 


National      Monetary      Commission 

Here  is  a  short  table  showing  the  fluctuations  of  the 
premium  on  gold,  20-franc  pieces,  and  bullion: 

[Premium  per  i.ooo.] 


Year. 


1871. 
187a. 

1873- 
1874.- 


ao-franc  pieces. 

Gold 

Maximum. 

Minimum. 

Maximum. 

i 

1             'S 

8K 

29 

1 

Va 

16 

9K 

H 

12H 

I)i 

Par. 

10 

Minimum. 

I- 

3 
8 

Par. 


Note. — In  the  loan  which  the  Bank  of  France  made  to 
the  State,  to  make  advance  payments,  it  furnished  the 
200,000,000  francs  of  the  loan  in  gold.  It  seemed  pref- 
erable, then,  to  ask  the  Bank  for  gold  rather  than  notes. 
The  reason  was  that  at  that  time  the  Bank  had  a  reserve 
of  only  100,000,000  francs  in  notes  before  reaching  the 
Hmit  of  its  issue.  It  did  not  care  to  raise  this  limit 
for  fear  of  causing  the  bank  note  to  lose  credit.  It  was 
deemed  better  to  leave  the  Bank  in  possession  of  its  notes 
to  help  it  in  making  discoimts.  If  it  had  given  bank 
notes  to  the  State  and  used  gold  for  its  discoimts,  a  part 
of  this  gold  would  have  been  exported,  and  the  case  would 
have  been  the  same  after  all  as  giving  gold  to  the  State, 
except,  however,  that  the  State  gained  gold  thereby — dis- 
charging indebtedness  at  par — and  the  bank  note  in  the 
meanwhile  kept  its  credit. 

It  is  important  to  emphasize  here  how  much  progress 
France  had  made  since  the  beginning  of  the  centiuy  in 
the  understanding  and  habits  of  credit  in  connection 
with  the  issue  of  notes;  for  when  in  1805  it  was  rmnored 
that  Napoleon  had  carried  off  gold  from  the  Bank  in  order 
to  make  war  in  Germany  a  mad  panic  broke  out. 

160 


Part  III. 

THE  BANK  OF   FRANCE  AND   THE   DEVELOPMENT 
OF  CREDIT,  1875  TO  THE  PRESENT  TIME. 

INTRODUCTORY. 

Extension  of  the  credit  companies.— The  Bank  of  France  remains  the  center  of  the 
credit  organization  in  France.— Its  gold  reserve  increases.— The  railroad  panic. 
The  agreement  of  1883.— Panics  of  1882  and  1889.— The  panic  of  the  local  banks. 

This  third  part  comprises  the  study  as  a  whole  of  the 
period  between  1875  ^^^  ^^^  present  time. 

It  is  a  period  especially  remarkable  for  the  development 
of  the  great  credit  companies,  first  in  France,  then  abroad, 
by  means  of  branch  offices. 

As  the  companies  expanded,  they  tended  to  become  in- 
stitutions somewhat  resembling  the  English  joint  stock 
banks.  They  were  not,  properly  speaking,  banks  for 
financing  industrial  enterprises.  They  continued  to  carry 
on  large  operations  in  disposing  of  securities,  but  were 
principally  concerned  with  selling  securities  that  might 
be  called  official — state  and  town  funds,  etc.  They  suc- 
ceeded in  building  up  an  extensive  discount  business. 
Their  deposits,  in  fact,  grew  to  large  proportions.  The 
nature  of  these  deposits  and  the  character  of  their  clients, 
influenced  the  nature  of  their  operations  in  making  them 
avoid  taking  risks.  It  is  through  these  companies  that 
the  surplus  capital,  not  used  in  France,  is  invested  abroad. 

The  Bank  of  France  still  remains  the  center  of  the 
credit  organization  in  France.  Even  if  it  makes  dis- 
counts directly  to  clients,  it  is  especially  and  above  all 
a  bank  of  rediscount  for  bankers  and  credit  companies. 


1971 — 10- 


■II 


161 


MP 


r 


^ 


N ational      Monetary      Commiss  ion 

Its  r61e  in  this  direction  is  becoming  more  and  more 
clearly  defined,  in  proportion  as  the  business  of  the 
credit  companies  expands.  As  the  savings  of  France 
increase  its  wealth,  part  of  this  wealth  is  converted  into 
capital  invested  abroad,  France  becomes  creditor  of 
foreign  countries,  through  the  interest  money  that  its 
citizens  receive,  and  so  shows  a  favorable  rate  of  exchange. 
The  country's  stock  of  coin  increases;  as  a  result  of 
this  the  Bank  of  France  sees  its  gold  reserve  grow.  Its 
silver  reserve,  on  the  other  hand,  tends  to  diminish.  In 
fact,  since  France  stopped  coining  silver,  owing  to  the 
depreciation  of  the  white  metal,  it  is  bimetalHst  on  its 
domestic,  although  gold  monometallist  on  the  foreign 
market.  Thus  the  gold  reserve  of  the  Bank  of  France 
has  lately  gone  beyond  3,600,000,000  francs.  Its  silver 
reserve  is  lowered  only  by  the  use  made  of  5-franc  pieces 
to  recoin  fractional  money. 

This  accumulation  of  gold  has  another  cause.  The 
note  of  the  Bank  of  France  enjoys  an  unquestioned 
credit;  it  is  much  in  demand,  and  tends  to  replace  gold 
coin  in  circulation.  It  has,  therefore,  helped  to  bring 
back  to  the  coffers  of  the  Bank  a  part  of  the  stock  of 
gold  in  circulation. 

This  period  witnesses,  too,  a  still  more  marked  decline 
in  the  rate  of  interest.  This  is  due  to  the  abundance  of 
capital,  and  also  to  the  ease  with  which  it  is  placed  at  the 
disposal  of  the  public  by  means  of  the  credit  societies 
and  their  mode  of  procedure,  so  different  from  that  of 
private  banks. 

Of  course,  this  evolution  did  not  take  place  without 
crises  and  difficulties.     Prosperous  times,  which  always 

162 


Evolution     of    Credit     and     Banks 


tend  to  produce  excessive  and  risky  speculation,  are  fol- 
lowed by  periods  of  liquidation — of  reflection,  one  might 
say,  which  in  turn  is  nothing  but  the  natural  conse- 
quence of  the  conditions  brought  about  by  such  over- 
speculation. 

In  this  case,  one  of  these  periodic  crises  was  complicated 
by  a  crisis  in  the  national  finances  caused  by  too  great 
haste  in  completing  the  railroad  system  of  France. 
Prospective  results  loomed  too  large  in  the  distance, 
and  dwindled  as  they  came  near.  The  whole  thing 
ended  by  the  State's  making  an  arrangement  with  the 
railroad  companies,  which  was  a  sort  of  necessary  liquida- 
tion of  affairs,  and  was  called  "the  agreement  of  1883." 

However,  in  spite  of  many  errors  and  useless  State  ex- 
penditures, tax  returns  came  in  regularly,  and  more  pros- 
perous years  produced  a  surplus  and  furnished  abundant 
resources  to  the  growing  budgets.  The  price  of  state 
stock  rose  steadily,  as  a  natural  result  of  the  general 
lowering  of  the  rate  of  interest  on  money,  owing  to  the 
abundance  of  capital.  This  rise  lead  the  Ministers  of 
Finance  to  make  conversions.  The  profits  of  these 
conversions,  however,  were  quickly  swallowed  up  in  the 
rising  tide  of  expenses.  There  was  a  dark  side  to  the 
picture.  The  economic  evolution  was  not  accomplished 
without  difficulties  and  friction.  We  shall  mention  the 
panic  of  1882,  simple  enough  in  its  causes;  then  the  one 
of  1889,  which  contains  valuable  instruction.  The 
Comptoir  d'Escompte  was  destroyed  by  it,  but  soon  rose 
from  its  ashes  and  resumed  the  work  interrupted  by  the 
ruinous  mistakes  of  a  bad  management.     Henceforth  it 


i 


163 


National      Monetary       Commission 

extended  its  activities  by  following  a  wise  and  profitable 
plan  of  business. 

The  local  or  provincial  banks  suffered  from  the  exten- 
sion of  the  agencies  of  the  credit  companies,  and  up  to  a 
certain  point  also  from  the  increase  of  the  branch  offices 
of  the  Bank  of  France,  which  has  opened,  especially  of 
late  years,  branches  or  suboffices  and  made  "bankable" 
many  affiliated  towns  in  numerous  localities.  Will  the 
local  banks  be  able  to  adapt  themselves  to  this  new  situa- 
tion? Certain  ones  made  the  attempt,  it  seems,  and  were 
changed  to  district  credit  companies;  others  disappeared; 
still  others  remained,  and  confined  themselves  to  certain 
special  functions. 

Finally,  we  shall  take  occasion  to  explain  the  condi- 
tions under  which  the  State  in  1897  renewed  the  privilege 
of  the  Bank  of  France.  It  asked  services  of  the  Bank  in 
the  shape  of  loans  and  a  share  in  the  profits.  The  Bank, 
however,  remained  self-governing  and  independent  of  the 
State.  We  shall  have  to  express  fears  for  the  future  in 
what  concerns  both  the  Bank  of  France  and  the  credit 
companies,  with  regard  to  the  restrictive  measures  that 
are  being  planned  against  them  by  a  certain  political  and 
social  faction. 


Chapter  I. — The  situation  of  France  after  the  war,  A 
glance  at  the  development  of  saving  and  savings  insti- 
tutions. 

Creating  capital  by  economy  is  at  the  very  foundation 
of  French  finance.  This  particular  characteristic  be- 
came still  more  marked  after  the  war  of  1870-71.  There 
was  need  of  it,  to  be  sure,  to  heal  the  country's  wounds, 
to  restore  its  military  equipment,  to  organize  new  indus- 
trial undertakings  or  transform  existing  ones.  The  sav- 
ings banks  are  an  indication,  especially  in  France,  of  the 
development  in  the  creation  of  capital.  In  the  following 
table  we  give  for  every  five  years  the  balance  due  depos- 
itors on  December  31  from  the  private  savings  banks,  and 
also,  after  1885,  the  balances  due  depositors  on  the  same 
date  from  the  National  Savings  Bank,  adding  to  this  the 
independent  means  of  the  private  savings  banks. 

[Million  francs.] 


Year 


187s- 
1880. 

188s- 
1890. 

1895- 
1900. 

1905. 


Private  savings  banks. 


Balance 
due  depos- 
itors De- 
cember 3 1 


660.  4 

1. 280. 2 

2. 211. 3 
2. 911- 7 
3.395-4 
3.264.0 

3.376.S 


Independ- 
ent means 

of  the 
banks  De- 
cember 3 1 , 


21.  o 

29.9 

47-5 

73-3 

10S.9 

138.3 

166.5 


Balance 
due  depos- 
itors De- 
cember 3 1 , 

by  Na- 
tional sav- 
ings Bank.o 


154.  I 

413- 4 

753-4 

I,  010.  o 

I, 278. o 


Grand 
total. 


681.4 

1,309-4 
2.412.9 

3.398.4 
4.254.7 
4>4I2.3 
4, 821. o 


164 


a  Created  by  the  law  of  April  9,  1881.  under  state  guaranty. 


^i 


N  ational      Monetary       Commission 

The  quinquennial  average  of  the  years  which  preceded 
the  war  of  1870-71  of  the  balance  due  depositors  on  De- 
cember 31   was  615,000,000  francs. 

It  is  seen,  then,  in  the  thirty  years  from  1875  to  1905 
that  the  total  funds  of  the  French  savings  banks  increased 
from  681,000,000  to  4,821,000,000  francs,  or  nearly 
5,000,000,000  francs,  increasing  sixfold.  And,  as  we  have 
said,  this  is  only  one  of  the  signs  of  the  growth  of  capital. 

In  this  interval  the  population  had  not  increased  to  any 
great  extent;  it  was  estimated  in  1875  at  36,500,000,  and 
in  1905  at  a  little  over  39,000,000  inhabitants. 

And  this  progress  in  saving  was  made  at  a  time  when 
the  expenses  of  the  budget  were  increasing. 

Here  is  a  list  for  the  same  years  as  in  the  previous  table 
of  the  resources  put  at  the  disposal  of  the  Minister  of 
Finance  through  taxes  and  public  revenues  of  all  kinds. 
The  resources  called  extraordinary,  which  come  from  loans, 
do  not  enter  into  the  calculation. 

Ordinary  receipts  of  the  budget. 

Francs. 

1875 2,  705,  300,000 

1880 2,957,000,000 

1885 3,056,600,000 

1 890 3.  229,  400,  000 

1 895 3f4i6,  000,  000 

1900 3.814.  000,  000 

1905 3.766,000,000 

So,  in  thirty  years  the  ordinary  receipts  of  the  budget 
increased  by  1,000,000,000  francs — no  small  additional 
burden  for  the  country.  The  quinquennial  average  of 
ordinary  receipts  for  the  years  preceding  1870  was 
1,800,000,000  francs.  The  expenses  of  the  war  increased 
the    ordinary    receipts    by    means    of    new    taxes    to 

166 


Evolution     of    Credit     and     Banks 

2,406,000,000  francs  in  1872,  and  to  2,679,500,000  francs 
in  1873. 

The  free  deposits  of  securities  at  the  Bank  of  France 
increased  in  large  proportions  (in  spite  of  the  competi- 
tion of  the  great  credit  societies  which  organized  an  impor- 
tant service  for  this  operation). 

For  the  ten  years  preceding  the  war  of  1870-71  the 
average  number  of  depositors  was  about  25,000  and  the 
average  value  of  securities  on  deposit  was  1,300,000,000 
francs.  The  following  table  will  give  an  idea  of  this  in- 
crease : 

[Million  francs.] 


Year. 


Number 
of  deposi- 
tors. 


1871. 

1875- 
1880. 
1890. 

1895 
1900. 

190S 
1906. 


20.693 
24.690 
27, 168 
39.899 
55.975 
73,620 

89.979 
92.508 


Securities 
on  de- 
posit. 
Current 

value  on 
Bourse 
Decem- 
ber 24. 


937- S 
1.456.  a 
I, 901. 3 

3.  "3-  I 
3.988.5 

4.939 
6.980 

7.233 


The  increase  of  transferable  securities  in  general  has 
been  very  large  in  France  since  the  war. 

L^on  Say,  in  his  remarkable  report  on  the  payment  of 
the  war  indemnity  in  1875,  estimated  the  value  of  foreign 
securities  owned  by  the  French  at  from  10,000,000,000  to 
12,000,000,000  francs.  It  is  three  times  as  much  to-day. 
It  is  not  our  intention  to  enlarge  upon  this  question, 
which  must   be   treated   by  another  author  in  another 

167 


■ 


>« 


:'t| 


X) 


National      Monetary       Commission 

study.  It  will  be  enough  for  us  to  give  these  few  figures, 
the  first  one  taken  from  M.  Say,  and  the  others  from 
M.  Newmarck. 

EstimcUe  of  foreign  negotiable  securities  owned  by  the  French. 

Francs. 
1875 --    10,  000,  000,  000  to  I2,OCX),  000,  000 

1880 13,  cxx),  000,  000  to  15,000,000,000 

1890 18, 000, 000, 000  to  20,000,000,000 

1900 25,000,  000,  000  to  27,000,000,000 

1903 28, 000,  000,  000  to  30, 000,  000, 000 

The  securities  listed  on  the  official  Paris  Bourse  (ac- 
cording to  the  estimate  of  December  31,  1902)  represent 
the  sum  of  130,000,000,000  francs,  divided  into 
64,000,000,000  francs  in  French  securities  and 
66,000,000,000  in  foreign  securities.  If  to  this  are  added 
securities  not  officially  quoted,  and  negotiable  at  the 
bank,  estimated  at  from  seven  to  eight  billion  francs,  we 
have  a  total  of  nearly  140,000,000,000,  of  which  about 
90,000,000,000  are  French  still,  according  to  statistical 
estimates  based  partly  on  facts  and  partly  on  theory. 

Without  yielding  too  much  to  the  magic  of  these  figures, 
it  is  certain  that  "movable  wealth,"  to  use  a  current  ex- 
pression, has  been  much  increased  in  the  last  thirty  years. 
And  this  increase  of  capital  in  France  is  not  the  special 
work  of  a  group  of  capitalists  but  for  the  most  part  of  the 
middle-class  citizens,  as  we  have  already  had  occasion  to 
point  out. 

But  we  will  not  insist  further  on  the  fact  that  a  large 
amount  of  capital  was  created  in  France  by  means  of 
economy;  one  need  not  be  either  an  expert  financier  or  a 
professional  statistician  to  discover  it.     There  is  no  end 

z68 


Evolution     of    Credit     and     Banks 

of  evidence.  Moreover,  the  consequences  of  this  accumu- 
lation of  capital  helped  to  emphasize  still  more  the  larger 
supply  of  which  it  was  the  object.  The  rate  of  interest  was 
lowered,  in  general,  and  the  discount  rate  in  particular. 
The  State  profited  by  this  to  make  successive  conversions 
of  its  stock.  The  law  of  November  27,  1883,  made  the 
conversion  of  5  per  cent  stock  to  4>^  per  cent;  that  of 
November  7,  1887,  converted  the  4K  per  cent  and  4  per 
cent  stock  to  3>^  per  cent;  then  that  of  January  17,  1894, 
converted  the  4K  percent  to  3K  per  cent;  and,  finally, 
that  of  July  9,  1902,  converted  the  3>^  per  cent  to  3  per 
cent.  These  conversions  involved  a  total  capital  of  more 
than  21,212,000,000  francs,  and  were  all  successful. 

If  we  have  called  to  mind  these  general  points,  it  is 
with  a  view  to  emphasizing  one  thing:  The  sources  of  the 
accumulation  of  capital  always  end  by  influencing  the 
manner  of  organization  and  working  method  of  the  credit 
institutions  of  a  coimtry.  It  is  in  national  habits  and 
character  that  these  have  their  principal  roots.  This 
will  appear  presently,  when  we  reach  the  study  of  the 
credit  companies.  But,  first  of  all,  we  must  describe 
briefly  the  crisis  of  1882,  then  that  of  1889,  outlining  at 
the  same  time  the  operations  of  the  Bank  of  France 
during  this  period. 


» 


169 


ll 


)'  If  I 


if 


H( 


I 


ml 


Chapter  ll.—The  crises  of  1882  and  i889~A  brief 
survey  of  the  operations  of  the  Bank  of  France  from  1873  to 
i88g — The  Comptoir  d'Escompte. 

The  construction  of  new  lines  of  railroads  after  1870-71.-The  Freycinet  pro- 
gramme.-Too  small  estimate  of  expenses.-Creation  of  redeemable  government 
stock.-Capital  borrowed  on  redeemable  3  per  cents.-Extraordinary  expenditures 
for  public  works,  1878-1882.-The  State  in  difficulties.-The  agreement  of  1883  - 
Speculation  from  1876  to  1882.-Investment  banks  float  large  issues.-Success  of 
toese  issues.-The  exaggerated  rise  in  stocks.-The  crash.-Intervention  of  the 
Bank  of  France. -First  effects  of  the  panic.    The  rate  of  discount  rises.-The  credit 
of  the  bank  notes  extends  and  increases.-Bank  dividends  resulting  from  the 
panlc-The  Comptoir.  during  the  war.  meets  all  obligations.-Precautions  taken 
to  keep  up  relations  between  the  foreign  and  home  agencies.-The  Comptoir  con- 
tinues its  operations  during  the  Commune.~It  cooperates  in  1871  in  Issuing  5- 
franc  notes.-The  Comptoir  shares  the  loans  made  necessary  by  the  war  -The 
deposits  of  the  Comptoir  after  the  war.-Fall  in  the  price  of  sUver.    Business  hi 
the  Far  East.-Convertfaig  and  unifyhig  of  the  Egyptian  debt.    Rfile  of  the  Comp- 
toir.-Increase  in  total  of  discounts.-Founding  of  agencies  in  Australia  and  San 
Francisco.-Public  works  undertaken.-Competition  of  the  other  credit  compa- 
ntes.-Contlnuation  of  the  Comptoir  for  twenty  years.-Conversion  and  loan  opera- 
tions.-Stagnation  of  bushiess  hi  1887.-Political  hicidents.  foreign  and  domestic- 
Idle  deposits.-First  loans  to  Metal  Company.-Absurdity  of  this  speculation— 
The  Comptoir  contmues  its  loans.-Increased  production  of  the  copper  mines.- 
The  Metal  Company  is  unable  to  meet  engagements.-Intervention  of  the  Bank 
of  France.-Loan  of  140.000,000  francs  to  the  Comptoir.-How  the  loan  was 
made.-Advantages  of  the  monopoly  of   issue  for  the  Bank.-Guaranty  of  the 
commercial  paper  of  the   Comptoir.-Good  results  of    the  liquidation  of  the 
Comptok.— Reorganization  of  the  Comptoir. 

The  period  from  1875  to  1882  was  a  time  of  midoubted 
prosperity.  This  prosperity  was  destined  to  end  in  a 
panic  brought  about  principally  by  two  causes.  One  is 
time-honored,  and  both  paves  the  way  for  panics  and 
makes  them  more  acute:  it  is  over-speculation.  The 
other  was  special  and  may  be  termed  accidental,  although 
it  had  a  precedent:  it  was  the  too  great  and  too  hasty 
extension  of  our  railroad  system. 

We  shall  consider  the  second  cause  briefly,  recalling 
only  the  facts  necessary  to  the  present  account. 


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Evolution     of    Credit     and     Banks 

After  the  war,  the  need  of  completing  the  railroad  sys- 
tem was  felt  to  be  urgent.  From  1871  to  1878  about 
6,000  kilometers  were  put  in  operation.  The  railroad 
lines  of  general  utility,  which  counted,  in  fact,  15,632 
kilometers  in  operation  in  1871,  had  21,435  in  1878.  The 
National  Assembly  had  in  its  last  sittings  before  adjourn- 
ment approved  an  imprudent  policy  in  this  regard,  and 
the  policy  was  continued.  A  first  experiment  which  led 
to  the  construction  of  a  state  system  in  1878,  one  might 
imagine,  would  have  dampened  the  ardor  of  the  megalo- 
maniac and  optimistic  partisans  of  the  construction  of 
many  and  extensive  railroad  lines.  But  nothing  of  the 
kind.  A  plan  was  concocted  to  endow  France,  in  the 
course  of  a  few  years,  with  a  complete  railroad  system, 
covering  the  country  with  a  closely  woven  network. 
M.  Freycinet  prepared  the  outline  of  these  great  works, 
which  were  to  include  not  only  railroads,  but  also  canals, 
harbor  improvements,  etc.  This  project  was  called  after 
the  name  of  its  originator,  the  Freycinet  programme. 

Altogether,  the  length  of  lines  decided  upon  in  1875, 
with  those  granted  on  the  score  of  local  utility,  which  were 
made  to  pass  into  the  class  of  lines  of  general  utility,  and 
including  the  new  lines,  reached  a  total  of  very  nearly 
10,000  kilometers. 

The  first  estimate  placed  expenses  at  about  4,000,000,- 
000  francs.  But  it  was  soon  clear  that  this  figure  would 
need  to  be  increased  by  3,000,000,000  or  4,000,000,000,  for 
the  originators  of  the  scheme  had  counted  without  the  un- 
expected: they  had  made  much  too  low  an  estimate  of  the 
net  cost,  and  had  omitted  to  take  into  account  that  the 
Chambers  would  enlarge  the  original  plan  to  a  degree 

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bordering  on  lunacy.  Political  high  bidding  was  ram- 
pant also  in  the  Senate,  where  it  was  usual  to  see  more 
prudence  than  in  the  Chamber. 

France  soon  became  a  great  railroad  workshop. 

In  order  to  meet  the  enormous  expenses  made  necessary 
by  this  enlarging  of  the  economic  "plant"  of  France, 
L^on  Say,  Minister  of  Finance,  created  a  new  government 
stock— redeemable  stock— the  capital  of  which,  divided 
into  a  series  of  75  payments,  was  reimbursable  by  means 
of  drawing  lots  for  a  period  of  seventy-five  years.  The 
original  law  was  passed  June  11,  1878.  This  stock, 
quoted  at  a  par  value  of  100  francs,  was  sold  in  reality  only 
in  15-franc  fractions.  It  therefore  resembled  railroad 
obligations. 

Up  to  December,  1880,  the  State  had  borrowed  by  this 
means : 

Sum  total  of  interest  on  government  stock 52,  530  360 

Total  nominal  capital _ ___'_  i,  751' 012' 000 

Total  actually  borrowed  capital ^\  439'  g^^'  ^j^ 

Ten  years  later,  on  December  24,  1890,  the  loans  in  the 
form  of  redeemable  government  stock  had  risen  to 

o                 t     e '  Francs, 

bum  total  ofmterest  on  government  Stock.      _    _  127  624  395 

Total  nominal  capital                  ^  4,  254,' 146;  500 

Total  actually  borrowed  capital 3,459.359,545    " 

And  here  are  the  extraordinary  expenses  of  the  budget 
for  public  works  from  1878  to  1882: 

Francs. 

^J  557,000,000 

l87Q__ 

'^  453,000,000 

1880 ,^0 

538,000,000 

'00'  -- 735,000,000 

1882 g-t-^ 

063,000,000 

otal 2,946,000,000 

17a 


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The  normal  loans  on  the  one  hand,  treasury  loans  on 
the  other,  swelled  our  funded  debt  and  our  floating  debt, 
the  latter  to  enormous  proportions.  The  State  had  under- 
taken the  construction  of  a  large  number  of  scattered 
and  unconnected  railroads.  Those  which  were  in  oper- 
ation were  bound  to  give  poor  results.  In  fact,  some  of 
them  were  administered  by  the  State  itself,  others  had 
been  put  into  the  hands  of  a  trustee  responsible  to  the 
State,  and  still  others  were  farmed  out  to  companies  at 
rather  burdensome  rates. 

Everything  indicated  that  before  long  the  State  would 
be  reduced  to  making  terms  with  the  great  railroad  com- 
panies, in  order  to  escape  from  a  troublesome  burden, 
and  to  avoid  also  involving  further  the  national  finances. 
Such  were  the  causes  of  the  agreement  of  1883. 

Our  purpose  here  is  not  to  describe  what  happened  on 
that  occasion,  but  to  show  to  what  extent  the  public 
authorities  were  responsible  for  the  speculative  fever  that 
seized  upon  France  at  that  moment. 

There  were,  too,  other  elements  involved.  Since  1876 
certain  banks  which  belonged  rather  to  the  category  of 
speculative  and  investment  banks,  such  as  the  Union 
Ginerale,  the  Cridit  General  Frangais,  the  Banque  de  Lyon 
et  de  la  Loire,  etc.,  had  begun  to  float  stocks  on  the  mar- 
ket, which  they  issued  with  a  bonus.  The  movement 
spread.  The  public  nibbled  at  the  issues  as  if  they  were 
forbidden  frmt.  Times  were  prosperous,  which  of  course 
helped  greatly.  The  issues  reached  their  highest  point 
after  1879  especially.  They  were  made  in  competition 
with  the  state  loans.     In  spite  of   this  avalanche,  the 


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average  level  of  all  stock  quotations  steadily  rose.  As 
may  be  seen  by  the  table  given  below,  the  total  sum  of 
issues  made  from  1876  to  1882,  when  the  crash  came, 
rose  to  more  than  9,000,000,000  francs. 

Francs. 
1876 266,  000,  000 

1877 j^  716,000,000 

1878 605,000,000 

1879 3,053,000,000 

1880 1,568,000,000 

1881 i^  223,500,000 

1882 524,  000,  000 

Total 9,055.500,000 

These   heavy   issues,   far   from   cooling   public   ardor, 
simply  excited  it.     In   1881   the  rise  in  stocks  assumed 
proportions  which  were  disquieting  to  all  business  men 
who  kept  their  heads  and  were  not  carried  away  by  the 
current.     The    Union    Gen^rale,   which  was    the    most 
active  in  promoting  the  bull  market,  pushed  its  shares 
so  successfully,  aided  by  the  nameless  complicity  of  the 
general   infatuation,   that   from   being   quoted   at    1,000 
francs,  at  which  its  shares  were  held  in  January,  1881, 
they  rose  to  nearly  2,900  francs  at  the  end  of  the  year. 
The  Suez  Company  followed  the  same  movement.     The 
rise  in  stocks  continued  in  spite  of  its  exaggeration  like 
an  irresistible  nervous  impulse.     The  speculators  seemed 
victims  of  a  sort  of  St.  Vitus's  dance,  inexpHcable  to 
anyone   who   is   not   famihar    with    the    psychology   of 
crowds.     The    first  days   of    1882   opened  with    shares 
of  the  Union  Generale  quoted  at  more  than  3,000  francs 
and  Suez  at  3,440  francs.     However,  the  speculators  were 
beginning  to   be   out   of  breath.     There  were  no  more 


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purchasers  for  these  securities,  at  least  at  this  price.  Then 
all  of  a  sudden  came  the  crash.  By  the  end  of  January 
Union  G^n^rale  fell  to  950  francs;  a  few  days  later  the 
company  was  declared  insolvent.  Suez,  which  repre- 
sented a  prosperous  undertaking,  did  not  go  to  pieces  in 
this  way,  but  the  stock  dropped  500  francs  in  a  very 
short  time. 

With  these  facts  as  a  starting  point,  we  will  now  see 
what  part  was  played  by  the  Bank  of  France  under  these 
circumstances. 

Let  us  give  first  the  statement  of  the  principal  accounts 
of  the  Bank  of  France  from  1876  to  1882: 

[Million  francs.] 


Average  reserve. 

Average 

notes 

in 

circula- 
tion. 

Total 
dis- 
counts. 

Rate  of  discount. 

Collat- 
eral 
loans. 

Running 
ac- 

Year. 

Gold. 

Silver. 

Maxi- 
mum. 

Mini- 
mum. 

counts, 
average 
balance. 

Per  cent. 

Percent. 

1876 

1.987-3 

2,484.0 

7.396.7 

4.0 

30 

290.  0 

360.  6 

1877 

3, 196.0 

2,489.7 

7.569.0 

3 

0 

2 

0 

376.0 

473   8 

1878 

2,072.7 

2.3390 

7.603.4 

3 

0 

2 

0 

409.0 

4II.O 

1879 

2,  iiS-o 

2, 199- 0 

7,  261.0 

3 

0 

2 

0 

402.  0 

421.  0 

1880 

1,974.0 

2.305.4 

8,697.0 

3 

5 

2 

5 

325.8 

4". 5 

1881 

604.  5 

I. 2195 

2.576.4 

11.3740 

5 

0 

3 

5 

1.1235 

468.2 

1882 

906.  6 

I, 140. 0 

2.732.3 

11,322. 2 

5 

0 

3 

5 

884. 1 

493-1 

1883 

982.7 

1,0450 

2, 926. I 

10,827.3 

3 

5 

3 

0 

664.6 

416.  0 

1884 

1,020.  9 

I, 004. 0 

2, 928.  I 

10,385.2 

3 

0 

3 

0 

626.  5 

387.0 

A  simple  examination  of  the  figures  shows  as  early  as 
1880  and  especially  in  1881  the  approach  of  the  panic. 
The  reserve  began  to  fall  as  soon  as  1880  to  1,975,000,000 
francs;  in  1881  it  was  only  1,824,000,000  francs;  these, 
we  must  remember,  are  averages.  But  in  1881  the 
gold  reserve,  which  was  648,000,000  francs  on  June  30, 
fell    to  552,000,000  francs  on   December  31,  showing  a 

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decrease  of  96,000,000  francs.  Because  of  this,  the  Bank 
raised  the  discount  rate  to  5  per  cent  as  early  as  October 
20,  which  diminishd  the  drain  upon  the  gold  in  its 
coffers.  In  comparison,  the  discounts  increased  from 
September  to  October;  they  rose  from  an  average  of 
1,100,000,000  francs  to  a  total  of  1,320,000,000  francs. 
Finally,  another  fact  which  shows  plainly  the  intensity  of 
the  speculative  craze  was  that  the  total  of  loans  on  securi- 
ties, which  was  325,000,000  francs  in  1880,  rose  in  1881 
to  1,125,000,000  francs  and  after  a  decHne  was  maintained 
at  884,000,000  francs. 

However,  raising  the  discount  rate  to  5  per  cent  on 
October  20  effectually  checked  the  drain  of  gold  from  the 
coffers  of  the  Bank,  and  on  December  31,  1881,  the 
reserve  reached  about  646,000,000  francs,  or  nearly  the 
figure  of  the  preceding  June. 

The  Bank  of  France,  therefore,  was  protected,  or  at 
least  ready  to  withstand  the  shock  of  the  panic  in  its 
acute  stage.  When  the  storm  burst  in  January,  the 
stockbrokers  of  Paris  and  Lyons,  who  had  not  paid 
sufficient  attention  to  the  consequences  of  this  frantic 
speculation,  could  not  meet  their  engagements.  The 
Bank  of  France  intervened  at  this  moment  and  advanced 
80,000,000  francs  to  the  parquet  of  the  Paris  Bourse 
and  100,000,000  to  that  of  Lyons — all  this  being  secured 
by  bills  of  exchange  and  collateral.  These  operations  in 
the  last  days  of  January  raised  the  figtwe  of  the  dis- 
coimts,  which  on  February  2  reached  1,646,000,000  francs. 

It  is  important  to  point  out  here  that  as  a  result  oi^ 
the  elasticity  of  issue,  the  Bank  could  make  discoimts 


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Evolution     of    Credit     and     Banks 


and  loans  with  greater  facility  in  proportion  to  the  re- 
serve; the  maximum  issue  in  1881  was  2,825,000,000 
francs,  and  in  1882,  2,953,000,000  francs. 

It  should  be  observed,  too,  that  when  the  Bank,  under 
some  accidental  circumstance,  such  as  a  panic,  for  in- 
stance, has  been  obliged  to  increase  its  issue,  the  figure 
reached  has  almost  always  been  maintained  afterwards. 
This  was  the  case  in  1883  and  1884.  After  a  number 
of  small  declines  the  average  for  1890,  rose  above 
3,000,000,000  francs.  At  the  same  time  the  gold  reserve 
tended  to  increase,  showing  that  the  bank  note  was  ac- 
cepted more  and  more  as  currency,  replacing  part  of  the 
gold  in  circulation.  This  phenomenon,  which  is  easy 
enough  to  understand,  began  to  be  especially  evident 
after  the  crash  of  1882. 

Moreover,  dividends  increased,  a  thing  that  always 
happens  when  the  Bank  intervenes  in  a  panic  to  support 
the  credit  of  the  money  market.  The  dividends  of  1881 
and  1882  were  respectively  250  and  290  francs.  The 
average  of  the  precedmg  five  years  had  been  about  125 
francs. 


I 


THE  COMPTOIR  D*ESC0MPTE  AND  THE  PANIC  OF   1 889. 

We  left  the  Comptoir  d'Escompte  on  the  eve  of  the 
war.  During  the  terrible  ordeal  of  the  invasion  this 
establishment  had  to  cope  with  many  needs,  and  it  ful- 
filled its  duties  as  a  commercial  bank  most  honorably  at 
this  critical  moment.  It  was  at  that  time,  next  to  the 
Bank  of  France,  the  largest  discount  house  in  Paris.  It 
attempted  to  send  for  disposable  funds  from  its  foreign 


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offices,  but  they  did  not  arrive  before  the  blockade  of 
Paris.  Notwithstanding,  thanks  to  its  resources,  it  was 
able  to  reimburse  depositors  for  rather  large  sums.  In  a 
single  week  it  repaid  40,000,000  francs.  In  addition  to 
this  the  Comptoir  served  as  an  intermediary  between 
the  merchants,  certain  bankers  of  Paris,  and  the  Bank 
of  France. 

In  presence  of  the  terrible  situation  of  the  capital  just 
before  the  siege,  the  Comptoir  had  taken  certain  precau- 
tions, and  likewise  the  Bank  of  France.  The  Comptoir 
sent  its  provincial  "portfolio"  and  some  of  its  officials  to 
the  Nantes  agency.  It  transported  to  the  London  agency 
its  foreign  "portfolio"  and  organized  there  a  special  serv- 
ice to  keep  up  the  relations  it  had  established  with  the 
credit  houses  of  all  foreign  countries,  and  to  maintain 
commtmication  with  the  agencies  across  the  Atlantic.  As 
for  the  Nantes  agency,  it  became  really  a  provisional 
center  for  France  and  the  other  French  branch  offices. 

During  the  insturection  in  Paris,  known  as  the  Com- 
mtme,  the  Comptoir,  after  taking  the  precaution  of  sending 
the  greater  part  of  its  assets  to  Versailles,  continued  in 
operation.  The  postal  service  being  no  longer  carried  on 
by  the  regular  public  authorities,  the  Comptoir  found  a 
way  to  send  and  receive  mail  by  way  of  Versailles.  So 
the  doors  of  the  Comptoir  remained  open  in  Paris  even 
during  the  rioting. 

In  October,  1871,  it  joined  with  several  other  credit 
companies  in  making  an  issue — authorized  by  the  Gov- 
ernment— of  5 -franc  notes.  These  notes  were  of  grekt 
service  to  commerce,  accepted  as  they  were  with  great 


Evolution     of    Credit     and     Banks 

favor.  Their  circulation  extended  to  the  whole  of  France. 
This  concern  of  course  had  an  important  share  in  the 
municipal  loan  of  Paris  in  1871;  it  received  subscriptions 
on  that  occasion  which  amounted  to  the  total  of  the  loan. 
Finally  it  collected  for  the  national  loan  of  3,000,000,000 
francs,  which  we  have  mentioned,  bids  of  15,000  sub- 
scribers that  represented  60,000,000  francs  interest,  or 
1,200,000,000  francs  capital — more  than  one-third  of  the 
loan.  lyike  the  great  French  banks,  it  helped  the  Govern- 
ment to  effect  the  transportation  or  exchange  of  these 
funds,  which  were  applied  to  the  payment  of  the  German 
war  indemnity. 

However,  the  Comptoir  did  not  come  through  the  terri- 
ble ordeal  of  the  war  without  suffering  its  effects.  At 
the  time  Paris  was  invested,  it  had  been  obHged  to  make 
large  reimbursements,  paying  out  40,000,000  francs  or 
more  in  a  single  week.  Now,  before  the  war  it  had 
63,000,000  francs  of  deposits.  It  was  a  long  time  getting 
back  to  this  figure.  In  1875  the  deposits  were  still  not 
more  than  54,000,000  francs. 

It  is  true  that  the  Comptoir  had  been  entirely  reor- 
ganized in  that  interval.  Then  had  come  the  fall  in  the 
price  of  silver,  which  had  already  been  foreseen,  but 
which  actually  happened  very  suddenly  in  1875  ^^^  1876. 
As  the  Comptoir  had  agencies  in  the  Far  East,  it  hastened 
to  decrease  transactions  in  that  part  of  the  world.  On 
the  other  hand,  the  Comptoir  commenced  at  that  time 
to  take  part  in  operations  known  as  "high  finance." 
It  transacted  successfully  all  the  business  connected 
with  the  unification  of  the  Egyptian  debt.     In    1876 


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Eg)^t  was  not  able  to  meet  its  engagements.  French 
and  English  capital  was  in  great  jeopardy  there,  and  it 
was  necessary  to  bring  pressure  on  the  Egyptian  Gov- 
ernment in  order  to  straighten  out  its  affairs  and  safe- 
guard the  interests  of  the  holders  of  the  debt.  After  an 
agreement  with  the  viceroy  of  Egypt,  the  Comptoir  was 
given  charge  in  London  and  Paris  of  operations  connected 
with  the  settlement  of  the  above  debt.  In  this  way  it 
operated  conversions  involving  3,800,000  certificates. 

Nevertheless,  the  Comptoir  continued  to  be  a  com- 
mercial bank  of  deposit  and  discount.  Deposits  came 
in  slowly  after  the  war,  but  showed  a  rapid  increase  after 
1876,  when  they  rose  to  72,000,000  francs.  Two  years 
later  this  total  exceeded  100,000,000  francs.  Discounts 
had  increased  from  1,200,000,000  francs  in  1874  to 
1,600,000,000  francs  in  1878,  the  year  of  the  World's 
Fair  in  Paris,  which  was  very  successful. 

About  this  time,  this  establishment,  which  saw  its 
business  falling  off  in  the  Far  East,  because  of  the  fluctua- 
tions in  the  price  of  silver,  began  to  restrict  its  operations 
in  that  part  of  the  world.  It  founded  agencies  in  Sydney 
and  Melbourne,  Australia,  which  gave  accommodation  to 
the  woolen  trade,  for  French  industry  obtains  from  that 
coimtry  a  large  supply  of  raw  material  for  its  woolen 
manufactures.  An  agency  was  opened  also  in  San 
Francisco,  because  of  its  commerce  with  the  Far  East, 
and,  also,  because  this  port  was  the  starting  point  for 
a  considerable  export  trade  in  wheat  with  France. 

Meanwhile  the  Comptoir  was  considering  two  important 
undertakings  which  were  later  carried  out  through  its 

x8o 


■J 


Evolution     of    Credit     and     Banks 

financial  assistance:  First,  constructing  the  sea  canal  of 
Corinth;  second,  building  the  Servian  railroad.  The 
aim  of  the  latter  enterprise  was  to  join  the  railroads  of 
Turkey  with  the  European  systems,  and  so  open  com- 
munication between  Paris  and  Saloniki. 

Beginning  with  1881,  the  competition  of  the  other 
credit  companies  was  felt  by  the  Comptoir.  These  com- 
panies (the  Credit  Lyonnais  and  especially  the  Soci^te 
G^n^rale)  were  to  increase  and  develop  their  commercial 
banking  operations  more  and  more.  So  the  discounts 
of  the  Comptoir,  which  amounted  to  i  ,900,000,000  francs 
in  188 1 ,  began  to  decrease  and  fell  in  1885  to  i  ,580,000,000 
francs.  However,  three  of  its  most  important  agencies, 
under  able  and  wise  management,  at  Marseilles,  Nantes, 
and  Lyons,  were  successful  on  a  large  scale. 

The  charter  of  the  Comptoir  Company,  which  estab- 
lished official  relations  between  that  company  and  the 
Government,  expired  in  1887.  After  making  inquiries, 
and  on  the  request  of  the  Comptoir,  the  Government 
decided  to  extend  the  charter  of  the  company  for  twenty 
years  from  March  18,  1887.  In  any  case,  these  relations 
with  the  State  seemed  rather  useless,  because  the  common 
law  of  1867  on  joint  stock  companies  would  have  been 
quite  sufficient  for  this  concern.  The  government  trade- 
mark did  not  protect  it  from  disastrous  errors,  which  were 
destined  to  bring  it  to  a  tragic  end  a  few  years  later. 

The  Comptoir,  still  acting  as  official  banker,  effected 
the  conversion  of  the  old  Tunis  debt  in  1884.  'I'wo  years 
later  it  concluded  a  loan  of  15,000,000  francs  with  the 
Madagascar  government,  organized  the  customs  service  to 


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National      Monetary      Commission 

insure  its  payment,  and  founded  agencies  at  Tamatave 
and  Tananarive. 

The  year  1887  was  a  difficult  one.  Two  events  made 
business  slack.  Frontier  incidents,  wantonly  exaggerated, 
provoked  a  tension  between  France  and  Germany.  In 
another  direction,  a  poUtical  crisis,  raging  among  the  high 
officials  of  the  Government,  made  it  necessary  for  President 
Grevy  to  resign,  after  a  scandalous  law  suit  and  violent 
polemics. 

The  Comptoir,  Hke  all  the  other  credit  concerns,  suffered 
from  this  state  of  things.  The  great  confidence  that  it  in- 
spired had  attracted  to  its  coffers,  both  as  deposits  and 
as  running  credit  accounts,  200,000,000  francs  (total  for 
December  31,  1887).  It  was  difficult  to  find  a  way  of 
using  this  capital  profitably,  a  fact  which  was  responsible 
for  a  gigantic  error,  destined  to  be  fatal  to  the  Comptoir. 

Among  its  cHents  at  this  time  was  the  Me{al  Company. 
The  Comptoir  consented  to  make  loans  to  this  company  on 
the  merchandise  it  bought.  There  was  nothing  abnormal 
in  this,  provided  these  loans  were  made  for  a  limited  sum 
and  after  prudent  calculation  of  the  risks  of  depreciation. 
However,  these  first  transactions  whetted  the  appetite 
of  the  Metal  Company.  The  purchases  it  effected  with 
the  aid  of  the  Comptoir  made  the  price  of  copper  rise. 
This  first  speculative  success  led  the  Metal  Company  to 
attempt  to  form  a  regular  trust  for  the  purpose  of  corner- 
ing copper.  It  negotiated  with  the  principal  companies 
which  engaged  in  copper  mining,  with  a  view  to  raising 
the  price  by  Hmiting  production.  To  anyone  who  kneW 
the  copper-mining  business  from  the  point  of  view  of  the 


( /■ 


Evolution     of    Credit     and     Banks 

producer  this  combination  was  absurd.  Both  the  di- 
rectors of  the  Metal  Company  and  those  of  the  Comptoir, 
though  it  had  been  claimed  that  they  were  informed  of 
the  facts  about  the  copper  market,  must  have  been  blinded 
by  the  chimerical  hope  of  absorbing  the  copper  product  of 
the  whole  world. 

The  president  of  the  Comptoir,  M.  Denfert-Rochereau, 
at  first  made  loans  to  the  Metal  Company  without  con- 
sulting his  administrative  board.  Later,  after  considerable 
capital  had  become  involved,  M.  Denfert-Rochereau  dis- 
closed the  state  of  affairs  to  the  administrative  council. 
It  was  alleged  that  at  this  moment  it  was  difficult  to  cease 
supporting  the  speculation  of  the  Metal  Company.  The 
fact  seems  hardly  admissible.  The  very  absurdity  of  the 
scheme  should  have  produced  a  rupture,  even  though  a 
painful  liquidation  must  have  been  the  consequence. 

The  final  scene  in  the  drama  was  at  hand.  As  might 
easily  have  been  foreseen  in  1888,  the  copper  mines,  profit- 
ing by  the  wild  contracts  made  with  them  by  the  Metal 
Company,  increased  their  output  enormously.  On  the 
other  hand,  the  price  of  copper  being  forced  up  very  high, 
artificially,  consumers  in  every  country  refused  to  buy. 
To  keep  on  buying  and  paying  and  never  selUng,  to  be 
crushed  under  the  piling  up  of  a  product  that  brings  in 
nothing,  is  a  situation  that  can  not  last  long.  A  sad  and 
unexpected  incident  gave  the  signal  for  the  disaster.  M. 
Denfert-Rochereau  committed  suicide  on  March  5,  1889. 
His  death  did  not  alter  the  catastrophe  in  any  degree,  nor, 
any  more  than  others  of  the  same  kind,  could  it  serve  as 
an  example. 

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N  ational      Monetary      Commission 


-. 


It  precipitated  a  panic  which  led  to  an  irresistible  run 
on  the  Comptoir  by  depositors  and  holders  of  running 
credit  accounts.  In  two  days  they  drew  out  70,000,000 
francs. 

We  were  on  the  eve  of  opening  the  exposition  of  1889, 
called  the  Centenary  of  the  French  Revolution.  A  dis- 
organization of  the  Paris  market  at  that  time  would  have 
been  fatal  to  this  international  festival  of  commerce  and 
industry.  At  that  juncture  the  Bank  of  France  came 
forward  and  loaned  the  Comptoir  140,000,000  francs  on  its 
commercial  paper  or  securities.  The  Bank  was  not 
obliged  to  take  this  amount  from  the  reserve,  as  the  loan 
was  made  almost  entirely  in  bank  notes.  The  circula- 
tion, which  on  March  7,  1889,  was  2,741,000,000  francs, 
rose  by  degrees  to  2,888,000,000  francs  on  April  4.  The 
discount  rate  was  not  and  could  not  be  changed.  The 
Bank  had  then,  by  the  law  of  June  30,  1884,  the  right  to 
issue  notes  up  to  3,500,000,000  francs;  so  there  was  still  a 
margin  of  760,000,000  francs  before  reaching  the  extreme 
limit  of  the  privilege.  Besides,  every  time  the  need  has 
been  felt,  the  maximum  figure  of  the  issue  has  been 
increased  without  question  by  Pariiament,  so  that  this 
maximum  may  always  be  considered  as  provisional.  It 
would  even  be  simpler  not  to  fix  the  maximum  issue  at  all. 

The  Bank  of  France,  then,  helped  by  these  operations 
the  liquidation  of  the  Comptoir.  It  should  be  noted  that 
the  latter  was  not  exclusively  a  speculative  bank.  It 
was,  indeed,  as  the  result  of  a  very  unusual  combination 
of  circumstances  that  it  made  the  mistake  of  supportuig 


184 


Evolution     of    Credit     and     Banks 


\ 


the  speculations  of  the  Metal  Company.     It  was  much 
more  a  bank  of  commerce,  holding  a  good  line  of  com- 
mercial paper;  its  main  business,  in  short,  was  making 
discounts.     To  be  sure,  the  total  of  discounts  had  de- 
creased latterly.     After  being  i  ,900,000,000  francs  in  1 88 1 , 
it  had  fallen  to  1,385, 000,000 francs  in  1887,  and  had  weak- 
ened still  more  in  1888  and  1889  as  a  result  of  the  com- 
petition with  the  other  credit  societies,  which  were  ex- 
tending   their    commercial    banking    operations.    The 
Bank  of  France  had,  therefore,  in  the  line  of  commercial 
paper  of  the  Comptoir,  guaranties  which  induced   it  to 
make  a  transaction  that  was  not  without  risk,  of  course, 
but  permitted  this  establishment  to  use  its  right  of  issue. 
The  liquidation  of  the  Comptoir  was  made  by  friendly 
agreement   and   was    ably   managed.     The   assets    were 
sufficient  to  settle  in  full  all  Habilities,  including  the  loan 
made  by  the  Bank  of  France.     After  balancing  accounts, 
even  the  capital  stock  was  found  to  be  nearly  intact. 

These  facts,  which  were  anticipated  from  the  beginning 
of  the  liquidation,  were  such  as  to  make  it  seem  desirable 
to  found  a  credit  establishment  which  could  resume  the 
name  and  the  traditions  (such  as  were  good)  of  the  old 
Comptoir.  A  group  of  financiers,  at  the  head  of  which 
was  M.  Denormandie,  a  former  governor  of  the  Bank  of 
France,  who  was  much  esteemed  in  the  business  world, 
undertook  to  reorganize  the  Comptoir. 

M.  Denormandie,  then,  made  terms  with  the  liquidators 
of  the  old  company  to  obtain  the  cession  of  the  title  and 
the  clientele  of  the  former  Comptoir,  as  well  as  its  build- 
ings and  furniture. 


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National      Monetary      Commission 

It  is  not  our  purpose  here  to  dwell  on  the  details  of  this 
reconstruction,  except  to  say  that  the  new  capital  stock 
was  fixed  at  40,000,000  francs.  The  issue  of  80,000 
shares  at  500  francs  took  place  May  15,  1889,  and  these 
shares  were  bought  by  the  shareholders  of  the  former 
Comptoir,  who  were  given  the  preference.  Additional 
bids  were  made  by  other  people  who  wished  to  subscribe; 
these  bids  made  a  total  of  85,000  shares,  and  had  to  be 

refused. 

It  was  with  20,000,000  francs,  the  quarter  of  the  capital 
paid  in,  that  the  new  Comptoir  began  operations  in  June, 

1889. 

The  offices  of  the  old  Comptoir  had  not  been  closed 
during  Uquidation,  so  that  business  went  right  on,  as  far 
as  the  public  was  concerned. 


186 


4 


$ 


Chapter  III. — The  panic  of  1890-91 — Intervention  of  the 
Bank  of  France  in  behalf  of  the  Bank  of  England — The 
Societe  des  Depdts  et  Comptes  Courants — The  local  crisis 
caused  by  it.    • 

Two  other  examples  of  panics.— These  examples  may  have  had  an  influence  on 
the  evolution  of  credit  companies.— The  Baring  failure.— The  Bank  of  England 
is  asked  for  assistance.— The  reduction  of  the  reserve  and  especially  the  lack  of 
freedom  of  issue  hhider  the  Bank  of  England  from  playing  its  proper  part. 

The  question  of  the  extension  of  the  credit  companies, 
which  is  the  heart  of  this  whole  discussion,  we  shall  leave 
to  the  next  chapter.  Meanwhile,  we  must  state  briefly, 
according  to  the  plan  we  have  adopted,  the  following 
facts,  which  it  is  necessary  to  know  in  order  to  understand 
the  role  of  the  Bank  of  France,  in  so  far  as  it  comes  to  the 
rescue  of  credit  during  panics.  And  perhaps  it  will  not 
be  without  value  to  show  that  the  same  causes  produce 
the  same  effects,  and  that  commercial  banks  always  come 
to  grief  when  the  rules  of  good  management  are  disre- 
garded. Just  as  the  old  Comptoir  d'Escompte  had  com- 
mitted itself  to  the  grave  error  of  violating  its  statutes, 
and  at  the  same  time  the  principles  of  good  administra- 
tion, so  the  Society  des  D6p6ts  et  Comptes  Courants  chose 
to  indulge  in  operations  that  no  commercial  bank  has  a 
right  to  touch.  It  went  under.  Although  in  the  financial 
world  examples  of  disasters,  coupled  with  the  most  tragic 
incidents,  are  not  always  heeded,  it  must  be  admitted 
that  the  two  successive  failures  of  the  Comptoir  in  1889 
and  the  Depots  et  Comptes  Courants  in  1891  were  some- 

187 


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> 


National      Monetary      Commission 

what  enlightening  to  the  cUents  of  this  sort  of  estabUsh- 
ments,  for  a  time  at  least.  On  the  part  of  administrators 
of  banks  or  credit  companies  there  is  a  growing  opinion 
that  the  regular  operations  of  commercial  banking  are 
sufficiently  profitable,  and  they  are  tending  to  lessen  risks, 
even  in  the  tmderwriting  and  marketing  of  securities, 
where  the  companies  are  often  nothing  more  than  inter- 
mediaries selling  on  commission  merchandise  which  it  is 
not  well  to  accumulate  in  the  warehouse. 

I. 

The  crisis  of  1890  was  confined  for  the  most  part  to  the 
London  market,  and  was  caused  by  the  Baring  failure. 
This  famous  old  concern,  engaging  in  large  operations  in 
loans,  speculation,  industrial  financing,  had  opened  far. 
too  extensive  credits  at  a  time  when  it  was  involved  in 
big  speculations.  Being  on  the  verge  of  suspending  pay- 
ments, it  appUed  to  the  Bank  of  England,  just  as  the 
former  Comptoir  d'Escompte  in  France  had  applied  to 
the  Bank  of  France.  A  syndicate  of  EngUsh  bankers 
went  security  for  the  request  of  Baring  Brothers.  But 
the  Bank  of  England  has  a  constitution  which  does  not 
allow  it  the  necessary  elasticity  of  issue,  in  case  of  need. 
In  order  to  imdertake  the  discounts  of  Baring  Brothers 
or  the  Syndicate,  it  was  obUged  to  diminish  its  reserve, 
which  decreased  its  issue  by  just  so  much.  It  raised 
the  discount  rate  to  6  per  cent,  but  though  that  was 
enough  to  protect  the  metallic  reserve,  it  did  not^  en- 
able the  Bank  to  procure  the  necessary  specie  to  come 
to  the  aid  of  the  London  market.     In  order  to  guard 

188 


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Evolution     of    Credit     and     Banks 

itself  against  the  rebound  of  the  London  crisis,  the  Im- 
perial Bank  of  Germany  had  already  raised  the  rate  of 
discount  to  5>^  per  cent. 

It  was  then  that  the  Bank  of  England  borrowed  of 
the  Bank  of  France  75,000,000  francs  in  gold,  with  which 
to  relieve  the  stress  of  the  English  market.  The  Bank 
of  France  was  not  affected  at  all  by  this  exportation  of 
coin.  The  average  reserve,  in  fact,  in  the  year  1890  was 
2,513,000,000  francs,  composed  almost  equally  of  gold  and 
silver.  In  London,  the  reserve  of  the  Bank  of  England 
had  fallen  at  the  height  of  the  crisis  to  a  little  less  than 
•500,000,000  francs. 

The  comparative  merits  of  the  systems  of  the  Bank  of 
England  and  the  Bank  of  France  have  been  a  subject  of 
much  discussion,  and  the  principal  element  of  this  dis- 
cussion has  been  the  state  of  the  reserve  of  the  two  estab- 
lishments. This  is  a  secondary  side  of  the  question,  in 
the  face  of  a  local  crisis  such  as  that  produced  by  the 
Baring  failure.  The  real  defect  of  the  English  system  is  in 
the  limiting  of  issue.  It  has  been  seen  that  the  Bank  of 
France  was  able  in  1889  to  come  to  the  aid  of  the  Comp- 
toir d'Escompte  without  drawing  on  its  specie,  thanks 
to  its  margin  of  issue.  Since  the  crisis  was  local,  the 
remedy  was  there,  close  at  hand.  If  the  Bank  of  Eng- 
land had  been  able  to  issue  notes  for  75,000,000  francs, 
in  order  to  meet  the  difficulties  of  the  crisis,  there  would 
not  have  been  the  slightest  need  of  an  appeal  to  the 
credit  of  the  Bank  of  France.  For,  since  the  Bank  of 
France  was  willing  to  give  credit  to  this  establishment,  the 
people  of  England  would  have  done  so  equally  by  accept- 
ing its  notes. 

189 


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National      Monetary      Commission 

II. 

The  second  crisis  which  we  must  mention  was  confined 
to  Paris.  It  was  caused  by  the  failure  of  the  Socidt^  des 
D6p6ts  et  Comptes  Courants.  Because  of  consenting 
to  run  risks  of  a  kind  that  no  bank  of  deposit  has  a  right 
to  incur,  this  company  was  forced  into  inevitable  bank- 
ruptcy. It  lost  a  lawsuit,  a  fact  which  attracted  the 
attention  of  its  depositors,  and  soon  aroused  their  sus- 
picion. It  experienced  a  panic,  just  as  the  Comptoir  had 
done,  though  a  less  serious  one.  This  happened  in  the 
beginning  of  March,  1891,  almost  exactly  two  years  after 
the  nm  on  the  Comptoir  d'Escompte.  In  four  days  the 
deposits  withdrawn  amounted  to  more  than  19,000,000 

francs. 

A  syndicate  of  bankers  was  formed  to  go  security  to 
the  amotmt  of  15,000,000  francs  for  the  D^p6ts  et  Comptes 
Courants.  The  Bank  of  France  came  to  the  rescue  again, 
just  as  it  had  done  two  years  before  in  the  case  of  the 
Comptoir,  and  advanced  60,000,000  francs  for  the  reim- 
bursement of  the  depositors  and  creditors  of  the  com- 
pany. It  received  as  security  the  "portfolio"  of  this 
company,  and  other  assets.  We  will  not  inquire  here  if 
the  Bank  was  entirely  disinterested  in  this  advance,  ar- 
ranged for  at  3  per  cent,  but  what  is  perfectly  certain  is 
that  on  this  occasion  the  total  of  its  discoimts  was  in- 
creased. It  rose  that  year  to  more  than  10,000,000,000 
francs,  a  figure  that  it  had  not  reached  since  1884.  At 
one  moment,  even,  in  1891,  the  discoimts  amounted  to 
1,361,000,000  francs.  As  for  the  reserve,  it  averaged 
more  than  2,553,000,000  francs,  of  which  1,279,000,000 

190 


\ 


{ 


Evolution     of     Credit     and     Banks 

were  in  gold.  The  following  year  the  gold  reserve  went 
beyond  1,547,000,000  francs.  In  this  same  year,  1891, 
the  discount  rate  was  maintained  at  3  per  cent. 

The  sums  needed  for  the  liquidation  of  the  Soci^td 
des  Depots  et  Comptes  Courants  were  not  so  large  as  in 
the  crisis  of  the  Metal  Company  and  the  Comptoir  in  1889. 
In  that  year  the  blow  to  credit  had  been  much  more 
serious  and  far-reaching.  However,  it  was  by  the  same 
procedure  and  with  the  same  results  that  the  Bank  of 
France  intervened.  In  spite  of  their  success,  these 
interventions  have  been  criticised.  Taking  a  general 
point  of  view,  it  has  been  asked  if  the  help  supplied 
so  quickly  by  the  Bank  of  France  to  insolvent  credit 
companies  was  not  of  a  nature  to  diminish  the  prudence 
of  the  administrators  of  these  companies,  and  to  give 
the  public  the  assurance  that  a  tutelary  establishment 
would  always  come  forward  to  protect  the  funds  deposited 
in  these  establishments. 

The  question  is  not  unimportant.  It  seems  to  us  that 
the  rule  to  be  followed  in  such  cases  is  perfectly  simple. 
The  Bank  should  intervene  only  when  its  advances  are 
substantially  secured.  It  acts  then  like  a  private  indi- 
vidual who  aids  without  risk  a  neighbor  in  distress. 
And,  as  it  has  the  privilege  of  issue,  it  may  do  it  for  a 
comparatively  moderate  price.  The  side  of  the  problem 
most  difficult  to  solve  is  to  make  the  general  public 
understand  the  conditions  of  this  intervention.  The 
public  is  in  need  of  being  better  informed  of  banking 
processes.  Now,  many  prominent  tradesmen  and  manu- 
facturers are  entirely  ignorant  of  the  role  and  mechanism 


191 


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National      Monetary      Commission 

of  the  various  kinds  of  banks.  It  is  a  deep-rooted  con- 
viction with  us  that  if  this  information  were  more  wide- 
spread, it  would  form  a  tradition  in  the  commercial  and 
economic  world  which  would  exercise  a  salutary  influence 
on  the  banks;  for  this  education  would  teach  people  not 
to  demand  miracles,  and  at  the  same  time  would  make 
them  watchful  of  the  mistakes  banks  may  be  guilty  of. 


192 


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Chapter  IV. — The  credit  companies  and  their  develop- 
ment— Extension  of  their  operations — Their  general 
method — Their  present  situation. 

The  bank  note.— Circulation  in  France  and  England.— The  bank  check.— Con- 
ditions of  its  use.— Transfers  of  accounts.— Founding  of  the  Soci6t6  du  Crfedit 
Industrial  et  Commercial.— Founding  of  the  Soci6t6  GfenSrale  pour  Favoriser  le 
D6veloppement  du  Commerce  et  de  I'lndustrie  en  France.— Founding  of  the  Crfedit 
Lyonnais  Company  (1863);  of  the  Society  Lyonnaise  de  D6pdts  and  the  Socifitfi 
Marseillaise  (1865).— Definition  of  check  by  French  law,  June  14-20,  1865.— 
Transformation  in  bank  methods.-The  banker  of  the  large  credit  companies  no 
longer  waits  for  his  customer  behind  his  window— he  goes  to  him.— The  credit 
companies  found  branches  in  the  principal  cities  of  France.— The  Bank  of  France 
Increases  the  number  of  its  branch  offices.— Parallel  development  of  branch 
offices  of  the  Bank  of  France  and  agencies  of  the  credit  companies.- The  Bank 
of  France  is  the  center  of  the  system  of  the  organization  of  the  great  credit  com- 
panies in  France  and  of  the  banks  in  general.— The  foreign  agencies  of  the  great 
credit  companies.— Financial  activity  of  France  abroad.— Analogy  between  the 
organization  of  the  credit  companies  and  the  centralization  of  the  French  Govern - 
ment.-Advantages  of  centralization.- Ways  of  escapmg  the  disadvantages  of 
centralization.-Service  for  the  publication  of  financial  reports.-Sight  deposits 
and  running  credit  accounts  grow  sixfold  in  twenty-four  years.— The  time 
deposits  show  little  or  no  increase.- Why  sight  deposits  are  preferable  here  to 
time  deposits.-Causes  of  the  increase  of  sight  deposits.-Remarks  on  the 
preceding  table.— The  avaUability  of  discounts.    The  rfile  of  the  Bank  of  France. 

We  have  already  seen  the  use  of  bank  notes  become 
general  in  France  in  proportion  as  the  need  made  itself 
felt.  I^ittle  by  little,  the  total  issue  of  the  Bank  of  France 
increased.  Every  time  the  necessity  arose  the  authori- 
ties extended  the  Hmit  of  issue.  Here  is  a  table 
recording  the  successive  stages  of  the  increase  of  circula- 
tion of  the  Bank  of  France,  and  the  dates  of  the  laws 
authorizing  an  increasingly  large  total  of  issue,  especi- 
ally after  i860. 

Francs. 
g°7 _ 84,600.000 

'    '° - 101,200,000 

1820  f, 

"      - - 153,800,000 

1830 _ 223,600,000 

^  ^^ "'"* "223,400,000 

1850 _ 485.600,000 

«  Law  of  March  15,   1848,  carrying  the  limit  of  issue  to  350,000,000 
irancs.     Law  of  December  22,  1849,  carrying  it  to  525,000,000  francs.     Law 
of  August  6,  1850,  annulling  the  limitation  of  the  law  of  December,  1849. 
1971—10 13  193 


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Francs. 

i860 0749,600,000 

1870 1,544.300.000 

1880 -    2.305,400,000 

,890 63,060,400,00c 

1900 4.034.  100,000 

1907 %  800,  400,  000 

1908  d 4.853.400,000 

In  1908  the  circulation  reached  a  maximum  of 
5,116,000,000  francs.  It  is  probable  that  the  circulation 
will  be  extended  still  more;  nevertheless,  the  Bank  has 
at  present  a  sufficient  margin. 

If  the  circulation  of  the  Bank  of  France  is  compared  with 
that  of  the  Bank  of  England,  it  is  very  evident  that  that 
of  the  Bank  of  England  is  much  smaller.  It  ranges  with- 
out much  variation  between  700,000,000  and  800,000,000 
francs — about  one-seventh  as  large  as  that  of  the 
Bank  of  France;  and  yet,  England  does  an  enormous 
business.  It  is  the  most  important  place  of  exchange 
in  the  whole  world,  a  center  of  large  financial  operations. 
It  possesses,  then,  a  substitute  for  the  bank  note,  a  tool 
which  takes  its  place;  this  substitue  is  the  check,  a  kind 
of  bank  money  which  plays  an  important  part  in  Eng- 
land,* and  is  a  simple  instrument  for  balancing  payments, 
ending  in  the  clearing  house.  Here  debts  and  credits 
are  balanced  to  the  amount  of  hundreds  of  billions  of 
francs.     The  check  has  been  used  in  England  for  a  long 

©Laws  of  August  12  and  14,  1870,  of  December  29,  1871,  of  July  15, 
1870,  carrying  limit  of  issue  successively  to  1,800,000,000,  2,400,000,000, 
2,800,000,000,  3,200,000,000  francs. 

6  Law  of  June  30,  1884,  limit  of  issue  3,500,000,000.  Law  of  January 
28,  1893,  limit  of  issue  4,000,000,000  francs.  Law  of  November^  7,  1897, 
limit  of  issue,  5,000,000,000  francs. 

c  Law  of  February  9,  1906,  limit  of  issue  5,800,000,000  francs. 

<*  The  maximum  circulation  in  1908  was  5,1 16,000,000  francs. 

194 


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Evolution     of    Credit     and     Banks 

time.  It  presupposes  a  whole  series  of  banks  of  deposits 
in  which  a  great  number  of  capitalists,  merchants,  manu- 
facturers, officials,  etc.,  have  deposits  and  accounts. 
Furnished  with  check  books,  they  draw  on  their  bank, 
and  pay  their  creditors,  tradesmen,  etc.,  in  this  way. 
The  check  saves  coin;  it  is  the  complement  of  the  mech- 
anism of  the  joint  stock  banks;  it  explains  how  England 
carries  on  such  a  large  business  with  a  very  limited 
metallic  stock.  It  is  certainly  a  rational  economic  organ- 
ization. If  the  Bank  of  England  had  a  less  archaic  and 
more  flexible  machinery  of  issue,  the  system  would  be 
perfect,  and  crises  in  the  English  market  would  be  less 
acute. 

The  Bank  of  France  of  course  opened  running  accounts 
with  its  clients  at  an  early  date;  it  gave  them  a  chance  to 
make  transfers  from  one  account  to  another  (pink  order) , 
or  to  pay  a  third  person  from  the  account  of  the  drawer 
(white  order) .  But  it  was  not  everyone  who  was  allowed 
formerly  to  open  a  running  account  at  the  Bank,  and  the 
accounts  were  not  yet  sufficiently  numerous  toward 
the  end  of  the  last  century  to  permit  making  clearances 
on  a  large  scale.  Moreover,  one  bank  alone,  or  nearly 
alone,  practicing  this  kind  of  operations,  scarcely  gives 
wide  scope  to  the  mechanism,  which  must  be  adopted  by 
a  whole  market  in  order  to  be  completely  effective. 

The  check  has  its  bases,  as  we  have  seen,  in  a  group  of 
banks  of  deposit  organized  after  the  plan  of  joint-stock 
banks. 

The  example  of  England,  as  well  as  the  forward  move- 
ment of  events,  often  more  or  less  unconscious,  led  cer- 


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tain  financiers  in  France  to  undertake  the  creation  of 
deposit  concerns.  In  1859  a  company  called  the  Credit 
Industriel  et  Commercial  was  founded  to  perform  this 
function.  The  aim  was  clearly  stated  to  the  public  as 
extending  deposit  accounts  with  the  use  of  checks  and 
using  these  deposits  for  safe  short-date  investments,  in 
such  a  way  as  always  to  have  available  funds  to  meet 
the  withdrawals  of  clients.  The  president  of  this  new 
credit  establishment  declared  in  so  many  words,  more- 
over, that  the  institution  proposed  to  imitate  the  joint- 
stock  banks.  To  gather  together  scattered  capital,  which 
is  most  often  unproductive  in  the  hands  of  its  possessors, 
to  pay  interest  on  it,  and  make  it  fruitful  by  using  it  in 
safe  short-date  loans — such  was  the  method  adopted.  Let 
us  remark  here  that  the  check  had  not  yet  been  legally 
naturalized  in  France.  The  law  which  sanctions  it,  in  fact, 
dates  from  June  14-20,  1865. 

Several  years  later  another  company  was  founded  in 
Paris,  called  the  Societe  Generate  pour  Favor iser  le  Deve- 
loppement  du  Commerce  et  de  V Industrie  en  France.  By  its 
title  one  may  see  at  once  the  tendency  of  this  company. 
It  was  a  sort  of  off-shoot  of  the  plan  originated  by  the 
Credit  Mobilier  of  the  Pereires.  This  concern  for  the 
"advancement  of  commerce  and  industry"  proposed  to 
make  industrial  loans  and  investments  and  to  speculate. 
But  besides  these  special  fimctions  it  intended  to  engage 
in  all  the  operations  of  joint-stock  banks,  receiving  depos- 
its, opening  running  accounts,  etc.  Mixing  together  oper- 
ations of  ''credit  mobilier'*  with  commercial  banking  was 
to  Unite  risks  of  a  very  different  nature  and  to  court  many 


Evolution     of    Credit     and     Bank 


^% 


{ 


dangers.  For  how  could  the  department  which  advanced 
funds  for  silent  partnerships  in  industrial  enterprises  (an 
operation  involving  large  risks)  be  kept  separate  from 
the  department  of  discount  and  running  accounts,  with  its 
deposits  payable  on  demand?  No  air-tight  compart- 
ment could  keep  them  separated.  This  kind  of  bank  is 
a  mixed  type. 

Other  establishments  were  founded  at  this  time  in  imi- 
tation of  the  Credit  Industriel  et  Commercial :  the  Credit 
Lyonnais  in  1863  at  Lyons;  and  two  years  later  (1865), 
in  the  same  town,  the  SociSte  Lyonnaise  de  Depots,  de  Comp- 
Us  C  our  ants  et  de  Credit  Industriel]  at  Marseilles,  the  same 
year,  the  Societe  Marseillaise  de  Credit  Industriel  et  Com- 
mercial et  de  Depots.     All  these  had  for  an  object,  if  not  a 
sole  object,  at  least  a  very  definite  one,  to  encourage  in 
these  very  important  centers  the  use  of  running  accounts 
and  check  books.     It  was  then  between  1859  and  1865 
that  were  founded  the  credit  concerns  which  were  later  to 
expand  and  become  powerful,  along  with  the  Comptoir 
d'Escompte  created  several  years  sooner,  under  circum- 
stances that  have  already  been  described.     But  this  latter 
establishment  had  been  organized  after  the  old  plan  of 
discount  banks;  it  was  not  until  afterwards  that  it  followed 
the  lead  of  the  new  concerns  and  began  to  try  to  spread 
the  use  of  checks  and  running  accounts. 

As  may  be  easily  seen,  all  these  companies  were  founded 
either  at  a  time  when  the  existence  and  legal  definition 
of  the  check  had  not  been  settled,  or  very  shortly  after. 
The  law  of  June  14-20,  1865,  defined  a  check  as  "  a  writing 
which,  in  the  form  of  an  order  for  payment,  allows  the 


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N  ational      Monetary      Commission 

drawer  to  effect  the  withdrawal  in  favor  of  himself  or  of 
a  third  person  of  the  whole  or  a  part  of  the  disposable 
funds  which  remain  to  his  credit  with  the  drawee."  "It 
is  signed  by  the  drawer,  and  bears  the  date  of  the  day 
when  it  is  drawn.  It  can  not  be  drawn  except  for  sight 
payment.  It  may  be  made  out  payable  to  bearer  or  to 
a  specified  person,  and  can  be  signed  'payable  to  the 
order  of '  and  even  transferred,  by  means  of  indorsement 
in  blank." 

The  check  is  preeminently  the  instrument  of  credit 
companies.  It  is  well  known  that  under  the  name  of 
"crossed  check"  it  plays  an  important  part  in  England 
However,  in  order  that  the  check,  which  is  only  a  tool,  a 
practical  means  of  payment,  may  be  of  service,  there 
must  be  many  deposits  and  accounts  in  banks  which  are 
engaging  in  these  operations. 

With  the  exception  of  the  Comptoir  d'Escompte,  these 
banks  did  not  develop  greatly  before  the  war.  Several 
of  these  banks,  even  after  the  war,  at  the  time  of  the  loan 
for  the  payment  of  the  5,000,000,000  francs  indemnity  to 
Germany,  also  for  the  restoration  of  our  military  equip- 
ment, and  later  at  the  time  of  the  loans  for  great  public 
works — several  of  them,  we  repeat,  engaged  in  the  sort  of 
operations  known  as  "high  finance"  without  the  epithet 
"  high  "  being  justified  by  the  superiority  of  the  operation. 

Until  1 88 1,  especially,  they  made  large  issues;  We  give 
the  figures  in  the  following  table: 

Francs. 

1876 _ 45,400,  CXX) 

1877 - 286,  600,  000 

1878 - 35,  100,000 

1879 2,  168,  800,  000 

1880 880,  400,  000 

1881 - - --  631,000,000 

198 


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Evolution     of    Credit     and     Banks 

It  is  true  they  continued  later  to  carry  on  operations  in 
disposing  of  loans,  but  from  this  moment  forth  they  began 
to  widen  their  scope.  Their  mode  of  work  was  to  be 
modified  little  by  little.  They  realized  the  advantage  of 
going  to  the  public  to  solicit  custom,  to  induce  it  to  open 
running  accounts,  and  consequently  to  make  deposits. 
Afterwards  they  organized  on  a  vast  scale  special  services, 
such  as  safety  deposit,  supervision  of  drawings,  cashing  of 
coupons,  loans  on  securities,  etc. 

And  it  was  not  only  by  printed  circulars  that  the  credit 
societies  infonned  the  public  of  the  advantages  they 
offered;  they  instructed  employees  in  the  business  of 
soliciting  patronage  and  making  overtures  {demarches)] 
hence  the  name  of  demarcheurs  was  given  to  these  em- 
ployees. 

Struck  by  the  very  obvious  fact  that  France  is  every- 
where a  land  of  economy,  some  of  these  societies,  such  as 
the  Soci^te  G^nerale,  the  Credit  Lyonnais,  and  the  Comp- 
toir d'Escompte,  founded  agencies  or  branch  offices  in  Paris 
and  the  provinces.  Gradually  the  number  of  these  agen- 
cies has  increased  and  covered  France  with  a  close  net- 
work. In  this  way,  they  gather  capital  everywhere; 
ever)rwhere  they  try  to  compete  in  certain  transactions 
with  the  local  banks,  which  produces  something  of  a  crisis, 
and  brings  about  a  slow  transformation  of  some  of  the 
local  banks  and  the  disappearance  of  others. 

Side  by  side  with  the  credit  companies,  the  Bank  of 
France  increased  the  number  of  its  branch  offices  and 
created  auxiliary  bureaus,  increased  very  much  the  num- 


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National      Monetary      Commission 

ber  of  affiliated  towns,  and  so  rendered  the  greater  part  of 
commercial  effects  bankable — that  is  to  say,  capable  of 
being  discounted  by  the  Bank,  which  collects  them  at  a 
greater  number  of  places. 

It  should  be  remarked  that  the  parallel  development  of 
branch  offices  and  agencies  of  the  Bank  of  France,  and  of 
the  agencies  of  the  credit  companies,  greatly  aided  the 
development  of  the  latter.  They  have  now  near  their 
agencies  a  branch  office  or  bureau  of  the  Bank  where  they 
can  rediscount  rapidly  their  commercial  "portfolio"  and 
realize  on  negotiable  securities  in  case  of  urgent  need. 

It  is  here  that  is  seen  the  intimate  connection  that 
exists  in  France  in  the  organization  of  credit,  such  as 
historical  evolution  has  made  it,  between  the  Bank  of 
France  and  the  credit  companies.  The  first  is  powerful 
because  of  its  privilege  of  issue  and  its  considerable  metallic 
reserve,  which  is  due  to  two  causes.  First,  the  continuation 
of  favorable  exchanges,  resulting  from  our  considerable 
investments  of  capital  abroad;  second,  the  great  credit 
of  the  bank  note.  With  these  two  advantages  the  Bank 
of  France  becomes  the  pivot  of  the  system ;  it  permits  the 
credit  companies  to  keep  a  very  small  metallic  reser^'^e;  to 
use  constantly  in  making  discounts  the  capital  which  is 
confided  to  them.  The  commercial  "portfolio,"  as  we 
shall  see,  ranks  next  to  the  metallic  reserve  among  avail- 
able resotuces,  because  it  is  easily  rediscountable  at  the 
Bank  of  France.  It  is  obvious,  then,  that  the  parallel 
development  of  the  credit  companies  and  the  branch 
offices  and  bureaus  of  the  Bank  of  France  is  an  interesting 
study. 


300 


Evolution     of    Credit     and     Banks 


{ 


Here  are  tables  which  sum  up  this  development: 

BANK  OF  FRANCE. 


Year. 


1890 
1897 

1903 

X907 


Number 

of  branch 

offices. 


94 

94 

Z26 


137 


Number  of  auxitiary 
bureaus. 


38 
38 
49 


Provinces. 


47 


Suburbs. 


Affiliated 
towns. 


I30 

128 
ai8 


384 


CREDIT  LYONNAIS. 


Year. 


1880. 

1900. 
1907. 
1908. 


Number  of  agencies. 


Paris.  France. 


33 
33 
53 

55 


28 
I3S 
173 
173 


Foreign. 


9 
17 
ao 
18 


COMPTOIR  D'ESCOMPTE. 


z88o. 
1900. 
1907. 
1908. 


26 

046 

49 


3 
86 

132 
140 


6 
17 
«3 
23 


SOClfiTfi  GfiNfiRALE. 


Total. 


353 
360 
393 


466 


Total. 


70 
184 
346 
346 


9 

139 

30X 

3za 


•  Including  branches  in  suburbs. 


*  Permanent.  «  Temporary. 


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The  Credit  Industriel  et  Commercial  has  no  provincial 
agency;  it  possesses  34  in  Paris  and  i  in  London. 

We  may,  then,  sum  up  for  the  four  great  companies  we 
have  just  been  discussing  the  extent  of  their  means  of 
work,  in  contact  with  the  pubhc,  by  the  number  of  their 
agencies.  (We  do  not  coimt  the  occasional  agencies  of 
the  Soci^te  G^nerale.) 

Agencies  in  France  in  1907: 

Paris  and  suburbs 235 

Provinces - - - - -  713 

Total  for  France _ -- - --  94^ 

These  950  agencies,  in  round  numbers,  are  like  so  many 
branches  springing  from  a  central  stem ;  but  each  of  them 
has  a  kind  of  separate  existence,  a  special  character, 
which  permits  it  usually  to  adapt  itself  to  the  environ- 
ment where  it  happens  to  be. 

In  1908,  the  total  number  of  the  foreign  agencies  of  the 
credit  companies  (some  of  which  are  very  large)  was  43. 

All  foiu*  of  the  companies  which  we  are  considering  have 
London  agencies;  the  Comptoir  d'Escompte  has  opened 
branch  offices,  too.  in  Liverpool  and  Manchester.  This 
company  and  the  Credit  Lyonnais  have  estabUshed  foreign 
agencies  in  nearly  every  important  commercial  center  in 
the  world.  In  Europe,  the  Credit  Lyonnais  has  European 
agencies  at  Brussels,  St.  Petersburg,  Moscow,  Odessa, 
Constantinople,  Geneva,  Barcelona,  Madrid,  Valencia,  Se- 
ville, and  the  Comptoir  d'Escompte  at  Brussels,  Monte 
Carlo,  and  St.  Sebastian. 


{ 


Evolution     of    Credit     and     Banks 

Outside  of  Europe  the  Credit  Lyonnais  has  established 
agencies  in  Egypt  at  Alexandria,  Cairo,  Port  Said ;  also  in 
Smyrna,  and  Jerusalem  and  Jaffa  in  Palestine. 

The  Comptoir  d'Escompte*  likewise  has  agencies  in 
Alexandria  and  Cairo,  but  it  has  founded  others  in  India 
(it  maintained  the  one  at  Bombay) ,  and  finally,  in  Sydney 
and  Melbourne,  Australia. 

Moreover,  this  establishment,  faithful  to  its  traditions, 
has  opened  a  certain  number  of  agencies  in  our  colonies 
and  protectorates.  In  Madagascar  and  our  Indian  Ocean 
possessions  it  has  seven  agencies,  including  those  at 
Tananarivo,  Tamatave,  Diego-Suarez,  etc.  In  Tunis  it 
has  four  agencies — at  Tunis,  Bizerte,  Sfax,  and  Sousse. 

So  the  financial  activity  of  France  thus  makes  itself 
felt  in  the  most  important  centers  of  the  world  excepting 
those  of  the  United  States  of  America.  In  1892  the 
Comptoir  d'Escompte  founded  an  agency  in  San  Francisco 
and  a  provisional  one  in  Chicago;  then  in  1895  one  in  New 
Orleans.  But  it  closed  the  Chicago  agency  in  1900  and  a 
few  years  later  those  of  San  Francisco  and  New  Orleans. 

This  is  one  of  the  advantages  of  the  agency  system;  it 
makes  it  possible  to  suppress  very  quickly  the  useless 
branch  which  seemed  to  be  called  for,  but  which  has  not 
been  as  successful  as  its  founders  hoped.  The  system  of 
affiliated  banks  is  much  less  elastic.  These  have  a  sort  of 
independent  existence — a  personality — in  which  the  large 
establishments  that  helped  to  found  them  participate. 
Their  closing  certainly  involves  more  trouble,  and  the 
moral  effect  is  much  greater,  than  when  an  agency  is 
abolished.     We  are  alluding  to  the  system  of  the  great 


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National      Monetary      Commission 

German  credit  companies.  This  system  has  a  historical 
background  which  it  is  not  om-  purpose  to  dwell  upon  here, 
and  corresponds  to  conditions  different  from  those  of 
France. 

In  France,  the  organization  of  the  credit  companies,  so 
far  as  concerns  their  expansion,  is  modeled,  one  might  say, 
on  the  political  organization,  which  is  above  all  centralized. 
It  is  in  the  central  seat  of  the  credit  companies  that  the 
final  authority  rests.  From  there  issue  suggestions  and 
sometimes  orders.  It  is  by  the  central  offices  that  the 
agencies  are  supervised  and  audited.  Treasury  questions, 
the  placing  of  loans,  the  general  movement  of  business, 
everything  is  an  object  of  study  there.  The  system  of 
accounting  centraHzes  all  operations  and  makes  it  pos- 
sible for  the  head  men  to  take  in  at  a  glance  the  general 
business  situation.  These  are  the  advantages  of  the  sys- 
tem; one  might  fear  its  drawbacks,  dread  administrative 
red  tape,  the  tendency  to  reduce  everything  to  rules, 
delay  in  acting,  the  restriction  of  the  initiative  of  managers 
of  agencies.  Now,  the  companies  have  escaped  almost 
entirely  these  disadvantages;  the  heads  of  agencies  act 
with  a  certain  liberty;  their  vigilance  is  stimulated,  as  well 
as  their  activity,  by  the  method  of  remuneration  which 
makes  their  earnings  depend  largely  on  their  skill  and 
prudence.  Those  who  are  placed  at  the  head  of  foreign 
agencies,  sometimes  far  from  the  central  office  of  the  com- 
pany, even  though  they  have  general  instructions  which 
they  must  follow,  are  chosen  from  the  most  energetic, 
superior,  and  experienced  employees,  because  they  are 
often  obliged  to  make  quick  decisions. 


{ 


Evolution     of    Credit     and     Banks 

The  Credit  Lyonnais  and  the  Comptoir  d'Escompte 
have  each  organized  a  service  for  publishing  financial 
reports  in  which  one  can  constantly  follow  the  economic 
facts  that  bear  upon  business:  state  credit  and  loans, 
and  their  budgets;  all  kinds  of  industrial  companies, 
metallurgical,  coal-mining,  mechanical  construction,  spin- 
ning, and  weaving  companies;  trade  in  foodstuffs  and 
agriculture.  Numerous  documents  and  detailed  studies 
permit  the  heads  of  these  establishments  to  gain  a  rapid 
knov/ledge  of  the  main  lines  of  the  finances  of  a  country, 
the  situation  of  industrial,  commercial,  or  transportation 
companies,  and  of  the  other  banks.  Engineers  or  em- 
ployees who  have  technical  or  expert  knowledge  are  sent 
out  besides  to  examine  on  the  spot  questions  that  need 
clearing  up. 

What  is  more,  other  services  are  devoted  to  studying 
the  risks  either  in  what  concerns  discounting  commer- 
cial paper,  or  in  ascertaining  the  value  of  transferable 
securities. 

However,  it  would  be  difficult  to  understand  the  work- 
ings of  these  great  credit  concerns  without  knowing  in 
outline  both  the  automatic  control  that  results  from  a 
very  clear  system  of  accounting  and  the  factors  which 
enable  the  responsible  men  of  the  management  to  make 
rapid  and  timely  decisions.  Granting  that  a  mere  glance 
is  enough  for  a  banker  operating  on  a  given  market, 
imagine  what  a  knowledge  of  details  and  comprehensive 
view  of  the  whole  situation  is  needed  by  the  head  of  one 
of  these  great  houses,  whose  experience,  like  the  horizon 
that  he  sweeps,  must  be  as  broad  as  the  whole  world. 


204 


205 


I 


X  '. 


II 


National      Monetary      Commission 

THE    EXTENSION    OF   OPERATIONS    IN   THE   GREAT    CREDIT 

COMPANIES. 

The  credit  companies,  as  we  have  said,  commenced  to 
extend  their  Hne  of  discounts  and  to  receive  deposits  of 
increasing  importance,  beginning  with  1885. 

To  show  this  progressive  increase  in  deposits  and  dis- 
counting operations,  loans  and  "carry-overs"  (contangos), 
we  can  not  do  better  than  call  attention  to  the  table  that 
is  given  below.  As  may  be  seen,  it  includes  the  four  great 
companies  that  we  are  considering:  The  Credit  Lyonnais, 
the  Comptoir  d'Escompte,  the  Soci^t^  Gen^rale,  the  Credit 
Indus triel  et  Commercial.  Beside  these  appear  the  figures 
for  the  Bank  of  France  in  what  concerns  deposits,  dis- 
counts, and  loans  on  securities. 

From  1885  we  have  given  the  figures  only  for  every 
five  years,  judging  it  unnecessary  to  draw  up  a  complete 
table  of  every  year,  which  would  have  been  cumbersome 
and  more  difficult  to  understand.  These  statements  all 
refer  to  the  same  period,  which  is  a  necessary  condition 
in  making  clear  the  course  of  this  development. 


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Evolution     of    Credit     and     Banks 


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i 


r 


I 


National      Monetary      Commission 

In  glancing  at  the  columns  of  total  sight  deposits  and 
running  credit  accounts,  one  may  see  the  ratio  of  the 
increase;  it  was  very  nearly  regular.  From  660,000,000 
francs  the  sight  deposits  and  running  credit  accounts  rose 
to  3,970,500,000  francs  in  1908;  they  grew  sixfold  in 
twenty-four  years.  The  increase  is  due,  therefore,  to 
normal  and  deep-lying  causes,  since  the  upward  course 
of  the  deposits  followed  an  even  progression. 

Consulting  next  the  column  of  time  deposits,  an  increase 
is  visible  for  the  same  period  of  time,  but  in  proportion 
it  is  not  nearly  so  great,  since  the  total  of  these  deposits 
was  130,000,000  francs  in  1885  and  is  only  268,000,000 
francs  in  1908,  so  that  this  sort  of  deposit  has  merely 
doubled.     And,  again,  this  doubUng  is  due  chiefly  to  the 
Society  Generale,  whose  time  deposits  were  90,000,000 
francs  in  1885  and  168,000,000  francs  in  1908,  an  increase 
of  78,ooo,ooofrancs.     On  the  other  hand,  the  time  depbsits 
of  the  Credit  Lyonnais,  after  increasing  until  toward  1895, 
show  a  tendency  afterwards  to  decrease;  in  1908  the  total 
of  this  kind  of  deposits  was  the  same  as  in  1885,  40,000,000 
francs,  while  the  sight  deposits  and  running  credit  ac- 
counts rose  in  one  company  from  320,000,000  francs  in 
1885  to  1,745,000,000  francs  in  1908,  or  nearly  half  the 
sight  deposits  and  running  credit  accounts  of  the  four 
societies  combined  in  1908. 

This  tendency  to  prefer  sight  deposits  to  time  deposits 
proves  that  these  credit  companies  generally  use  the 
deposits  for  short-time  operations  such  as  discounts  and 
"carry-overs"  (contangos).  Moreover,  they  have  ob- 
served that  having  clients  in  every  class  of  the  population, 


308 


i 


{ 


Evolution     of    Credit     and     Banks 

and  in  every  part  of  the  country,  large,  medium  or  small 
manufacturers  and  tradesmen,  people  living  on  their 
income,  officials,  etc.,  the  deposits  and  withdrawals 
balance  each  other  in  such  a  way  as  to  maintain,  not  an 
even  level,  of  course,  but  an  average  level,  which,  in 
making  it  possible  to  count  on  an  average  length  of 
time  for  retaining  deposits,  gives  the  companies  full 
security  to  engage  in  their  various  operations.  Since 
the  interest  allowed  on  sight  deposits  is  less  than  on 
time  deposits  (which  latter  is  i,  2,  or  3  per  cent  according 
to  the  number  of  years),  it  has  been  possible  to  lower 
very  appreciably  the  discount  rate. 

Whence  comes  this  increase  in  sight  deposits?  From 
several  different  kinds  of  causes. 

In  the  first  place,  the  increasing  number  of  agencies 
gather  capital  through  the  whole  of  France  by  offering 
accommodations  to  depositors  and  by  soliciting  trades- 
men of  every  kind,  large  or  small,  to  open  running  ac- 
counts. These  various  accommodations  given  to  clients 
come  mostly  from  the  very  genuine  competition  of  the 
companies  with  one  another.  The  small  interest  allowed 
on  sight  deposits,  even  though  it  has  been  as  low  at 
times  as  one-half  per  cent,  is  one  of  these  advantages. 
This  rate,  moreover,  is  not  uniform  for  all  clients,  and 
this  is  easy  to  understand  in  the  case  of  those  who 
have  opened  running  accounts.  Here  the  agreement 
made  may  change  according  to  the  state  of  the  account, 
which  depends  in  turn  on  the  kind  of  transactions  the 
tradesman  or  manufacturer  engages  in  and  the  nature 
of  the  service  he  asks  of  the  credit  company. 


1971 — 10 14 


209 


National      Monetary      Commission 

It  is  useless  to  insist  on  this  point.  Every  bank  in  the 
world  has  solved  it  in  the  same  way.  The  various  people 
who  have  argued  that  a  banker  should  sell  his  services 
at  a  fixed  price  are  in  the  wrong  as  to  discounts,  loans, 
collections,  etc.  The  cUent  who  brings  large  business, 
easy  to  transact,  yielding  quick  profits,  may  be  given 
terms  such  as  would  not  be  granted  to  another  customer, 
whose  more  limited  operations  demand  just  as  much 
writing,  offer  more  risks,  etc. 

Let  us  consider  next  the  last  column  to  the  right  of  the 
first  part  of  our  table;  it  relates  to  the  Bank  of  France. 
We  see  that  the  totals  do  not  give  the  impression  of  very 
great  variation,  and  seem  from  1895  on  to  remain  sta- 
tionary. In  order  to  judge  of  these  variations,  let  us 
take  the  figures  representing  the  average  total  of  the 
commercial  discounts.  We  give  ever>'  other  year  here 
in  order  not  to  make  the  table  needlessly  long. 

Annual  average  of  discounts  of  the  Bank  of  France  {Table  B). 

Francs. 

1885 784,300,000 

1887 577.900.000 

1889 713,800,000 

1891 760,700,000 

1893 579.300,000 

1895 543,600,000 

1897 730,400,000 

1899 828,300,000 

19OI --- 592,400,000 

IQ03 • 688,  000,  000 

1905 - 640,500,000 

1907 I.  125,700,000 

1908 --- 897,000,000 

As  may  be  seen,  the  tendency  indicated  by  the  last 
balance  sheet  of  each  year  showed  very  clearly  a  stagna- 
tion in  the  whole.    The  only  large  figure  is  the  1,125,700,000 

210 


Evolution     of    Credit     and     Banks 

francs  for  the  year  1907.  This  is  due  to  the  crisis  which 
had  begun  in  1906,  and  whose  effects  were  still  apparent  in 
1908  in  the  total  of  897,000,000.  This  shows  that  even  if 
the  commercial  "portfolio"  of  the  Bank  of  France  has 
risen  slowly  for  thirty  years,  in  comparison  with  that  of 
the  credit  companies,  it  increases  distinctly  during  crises. 
The  bank  is  the  place  of  refuge  where  the  credit  com- 
panies and  other  banks  come  to  rediscount  their  com- 
mercial bills  and  turn  them  into  ready  resources. 

In  order  to  see  this  clearly,  it  will  be  enough  to  call  to 
mind  the  average  figures  of  the  commercial  discounts 
of  the  Bank  of  France  during  the  serious  crises  that  we 
have  experienced  in  France  since  the  war. 

Prancs. 
1871 j^  164,000,000 

^^72-- _ _ 2,089,400,000 

1 873 2,  299,  400,  000 

'^74 _ ___  I,  760,600,000 

^^75- 1,305,  200,000 

'  °76  - — ^6^  000,  000 

1881 — j^  jg^^  700,000 

1882 _ _  j^  j^j^  100,000 

'^--- - - 1,027,  700,000 

'  ^ - - - 996,  700,000 

The  crisis  of  189 1  is  marked  by  a  slight  increase  which 
is  always  shown  in  this  way  by  the  average  total  of  dis- 
counts. 

Francs. 
'^90-- 669,000,000 

^  9^ - --- 760,700,000 

9^ - 550,400,000 

Although  there  is  something  like  a  regular  increase  in 
the  discounts  of  the  Bank  after  1897  (see  Table  B),  there 
are  nevertheless  very  marked  fluctuations  up  or  down. 


A 


311 


National      Monetary      Commission 


Evolution     of    Credit     and     Banks 


i 


In  reality  the  Bank  of  France  follows  a  different  plan 
from  the  credit  companies  and  private  banks  in  general 
in  the  matter  of  discounts.  Its  rate  is  uniform,  for  the 
most  part,  and  is  modified  as  little  as  possible.  The 
Bank  can  do  this,  thanks  to  a  sufficient  margin  of  issue 
and  an  imposing  reserve.  But  this  state  of  affairs  does 
not  give  it  the  flexibility  of  the  other  credit  estabHsh- 
ments,  which  are  quite  right  in  not  maintaining  a  fixed 
discount  rate.  This  is  even  a  leading  distinction  between 
the  companies  and  the  large  department  stores,  to  which 
they  are  often  compared. 

Moreover,  the  credit  companies,  as  we  have  said,  solicit 
patronage.  They  oiBfer  interest  on  deposits,  and  if  the 
cUent  is  an  important  house  and  furnishes  good  paper 
for  large  sums,  they  make  special  prices  in  his  favor. 
Finally,  we  will  call  to  mind  once  more  that  the  network 
of  their  agencies,  both  in  Paris  and  all  of  France  and 
abroad,  extends  the  boundaries  of  their  activity. 

What  is  more,  they  keep  in  stock,  one  might  say,  a  full 
line  of  banking  articles;  they  take  foreign  paper,  deliver 
letters  of  credit  for  all  countries,  make  collections  on  all 
markets,  etc.  Their  agencies  are  so  arranged  as  to  give 
the  quotations  on  the  different  bourses  as  fast  as  they 
are  made.  One  may  enter  freely  into  these  agencies, 
which  are  not  so  awe  inspiring  as  the  old  banking  houses. 

Thanks  to  numerous  deposits,  coming  from  an  eco- 
nomical country  like  France,  they  have  also  been  able  to 
make  discounts  at  rather  reduced  rates.  Here  is  a  table 
which  gives  the  average  yearly  rate  of  the  discounts  in 
France  and  the  principal  foreign  countries. 


Average  discount  rates. 


f 


France. 

Bncland. 

Germany. 

Austria 

Year. 

Outside 
rate. 

Bank  of 
France. 

Belgivun. 

1892 

2.  70 
2. 10 

2.  20 
3.00 
3.00 
3.00 
3.00 

3.  45 
3- 05 

2.52 
2.00 
3.  26 
3.72 
3.29 
3-OI 
4.27 
4.92 
3.00 

2.  20 
3.10 
4.28 
4. 10 
4.22 
3.82 

5- IS 
6.03 

4.75 

4.02 
4- 30 
4.16 
4.08 
3.  so 
3.70 
4.33 
4.89 
4.2s 

2.  70 
2  60 

1895.-- 

1.38 
2.06 
2.  46 
2.02 
2.03 
2.58 
3.30 
2.14 

1898 

3.04 
3.28 
3.00 
3- 17 
3.84 
4.94 
3.  SO 

1901 

1904 

190S 

1906 

1907 

1908 

THE     METHODS     WHICH     THE     GREAT     CREDIT     COMPANIES 
USUAI^IvY  FOIvUOW — ^THEIR  PRESENT  SITUATION. 

We  have  seen  on  what  the  credit  companies  of  France 
base  their  operations.     They  derive  their  resotu-ces: 

First,  from  third  parties — depositors,  holders  of  run- 
ning credit  accoimts. 

Second,  from  their  own  capital  and  reserve. 

We  have  noticed  that  the  sight  deposits  and  nmning 
credit  accounts  had  increased  greatly  with  them,  and 
that  on  December  3, 1908,  they  were  nearly  4,000,000,000 
francs  for  the  four  following  societies:  Credit  Lyonnais, 
Comptoir  d'Escompte,  Soci^td  G^n^rale,  Credit  Industriel 
et  Commercial. 

We  have  also  called  attention  to  the  tendency  of  several 
of  them  not  to  increase  their  time  deposits.  If  the  total 
of  sight  deposits  and  running  credit  accounts  rose  from 
660,000,000  francs  in  1885  to  3,970,500,000  francs  on 
December  31, 1908,  it  was  because  of  the  increase  of  these 
deposits  at  the  Societe  G^n^rale. 


% 


212 


^1 


213 


National      Monetary      Commission 


■y  . 


I' 


I 


To  make  clear  how  these  societies  employ  their  different 
resources,  it  is  not  necessary  to  write  at  length.  The 
arrangement  of  the  accompanying  table  will  give  a  better 
idea  of  the  workings  of  these  societies  than  long  explana- 
tions. Some  explanations  should  be  given  perhaps  as  to 
the  arrangement  of  the  table  itself.  It  is  a  balance  sheet 
in  fact,  or  at  least  a  group  of  balance  sheets  of  these  four 
companies  on  December  31,  1908.  The  assets  are  made 
up  after  the  usual  fashion;  the  liabilities  are  divided 
into  two  parts — one  of  them  is  called  "  Resources  coming 
from  third  parties,"  and  the  other,  the  "Companies'  own 
•resources."  For,  although  the  companies  owe  their  capi- 
tal and  reserve,  in  the  last  analysis,  to  their  stock- 
holders, this  capital  and  reserve  are  primarily  to  protect 
clients,  those  third  parties  who  have  intrusted  their  funds 
to  the  companies.  It  was  necessary  to  distinguish  this 
part  of  the  liabilities  from  the  other,  since,  with  regard  to 
cHents,  it  may  be  termed  assets. 

As  may  be  seen,  the  total  metallic  reserve  of  these  foiu* 
companies  is  401,500,000  francs.  Compared  with  the 
sight  deposits  and  running  credit  accounts,  payable  at 
any  time,  which  amount  together  to  3,970,500,000  francs, 
this  reserve  is  foimd  to  represent  about  10  per  cent  of 
the  debt  of  the  companies  payable  at  sight. 

It  will  be  noticed,  too,  that  the  collateral  loans  and 
"carry-overs,"  which  come  to  a  total  of  a  little  over 
898,000,000  francs,  compared  to  the  total  of  the  compa- 
nies' own  resoiu-ces,  which  are  789,500,000  francs,  shows 
only  a  relatively  small  difference — that  is,  898,000,000- 
789,500,000=108,500,000,  or  one-eighth.  Now,  in  these 
898 ,000,000  francs  are  included  "  carry-overs  "  for  an  impor- 
•  214 


Balance  sheets  for  December  ji,  1908,  of  the  principal  French  credit  companies. 

[In  thousand  francs.] 


Assets. 

Liabilities. 

Reserve 
and  cash 
on  hand. 

Discounts. 

Loans  on 
collaterals 
and 
"carry- 
overs." 

Running: 
debit  ac- 
counts. 

Govern- 
ment se- 
curities, 
shares, 
bonds. 

Miscella- 
neous 
movable 
and  im- 
movable 
property. 

Total. 

Resources  furnished  by  third  parties. 

Companies'  own  resources. 

Hame  of  Gim. 

Sight 
deposits. 

Running 

credit 
accounts 

Accept- 
ances and 
sundries. 

Bills  of 
fixed  ma- 
turities. 

Total  of 
liabihties 

with 
regard  to 

third 
parties. 

Firm. 

Various 
reserves. 

Profit  and 
loss  (net 
balance). 

Total  of 
com- 
panies' 
own  re- 
sources. 

Credit  Lyonnais 

153.710 

101,847 
119. 61S 

26.. 189 

1 

1.187.81s    1       4q8. 70^ 

549.600 

331.045 
324.677 

34.30«» 

8,594 

17.874 

113.546 

10, 696 

83.814 
56.456 
32.091 

4.042 

2,392,346 

1.330,940 

1,592, III 

260,63s 

756.328 

571.734 

389,606 

94.310 

988, 78s 

343.248 

728,070 

98.913 

231.723 

185.034 

107.979 

21,851 

40.510 

60,356 

168.066 

2, 017. 346 

r, 160,372 

1.393. 721 

215. 074 

250,000 

150. 000 

150, 000 

25.000 

125,000 
20.568 

37.772 
16, 000 

375.000 

170.568 

198,390 

45.561 

Comptoir  National  d'Escompte 

637.204 
751.618 
131. 776 

186,514 
250,564 

«;2.437 

Society  G6n6rale 

10.618 
4.561 

Credit  Industriel  et  Commercial. 

_._.l              _.. 

401,561 

2,708,433      898,308 

1.239.717 

150. 710 

177.303 

5.576,032 

I. 8x1. 978 

2.159,0x6        546,587 

268.932 

4. 786.513 

575.000 

199.340          15.179 

789.519 

197 1 — lo.     (To  face  page  214.) 


Evolution     of    Credit     and     Bank 


» 


( 


tant  sum,  at  least  one-third.     These  loans  on  securities, 
which  are  not  so  easily  realized  on  as  the  commercial  dis- 
counts, would  then  be  amply  covered  by  the  private  re- 
sources of  the  credit  companies  (the  capital  and  reserve). 
The  Credit  Lyonnais  even,  which  has  nearly  409,000,000 
francs  in  collateral  loans  and  "carry-overs"  (contangos), 
can  set  off  375,000,000  francs  against  these  less  available 
funds.     The  same  proportion   exists   for  the  Comptoir 
d'Escompte,  and  likewise  the  CrMit  Industriel  et  Commer- 
cial.    As  for  securities  held  by  these  companies,  they  do  not 
amount  in  round  numbers  to  more  than  15 1,000,000  francs 
in  which  the  Social  G^nerale  figures  for  i  i3,5oo,ooofrancs.' 
This  proves  that  these  companies  are  not  banks  for  invest- 
ments involving  risks,  and  speculating  on  negotiable  securi- 
ties.   The  Credit  Lyonnais,  holds  securities  only  to  the 
amount  of   10,500,000  francs;  the  Comptoir  d'Escompte 
for  17,800,000  francs;  the  Credit  Industriel  et  Commercial 
for  10,500,000  francs.     These  figures  represent  the  total 
amount  of  securities  on  deposit  of  the  concerns  we  have  just 
mentioned.     It  is  the  natural  course  of  the  business  of  their 
clients  in  operations  on  negotiable  securities. 

The  commercial  discounts  are  next  in  availability  to  the 
metallic  reserve,  which,  of  course,  is  always  available.  If 
the  latter  is  the  standing  army  of  capital  for  these  compa- 
nies, the  commercial  discounts  are  the  auxiliary  corps  of 
the  army  which  may  be  most  quickly  put  in  the  field 
These  discounts  for  the  four  great  companies  amount  to 
2,708,000,000  francs,  of  which  1,187,000,000  francs  are 
for  the  Credit  Lyonnais  alone.  Now,  in  France,  thanks  to 
the  Bank  of  France  and  its  margin  of  issue,  in  panic  times 


215 


II' 


r 


National      Monetary      Commission 

these  companies  can  rediscount  at  this  establishment  a 
part  of  their  "portfolio."     Although  the  EngUsh  jomt- 
stock  banks  take  great  precautions  in  their  plan  of  pro- 
cedure, they  have  not  m  the  Bank  of  England  the  same 
resource,  for  it  is  just  at  the  moment  when  it  ought  to 
increase  its  issue-that  is  to  say,  in  panic  times-that  it 
is  bound  by  the  act  of  1844-     Every  system  of  bank  issue 
must,  then,  tend  to  give  either  to  a  single  bank  (if  the 
monopoly  is  established)  or  to  the  banks  of  issue  (if  a 
number  of  banks  have  been  decided  on)  the  greatest  pos- 
sible elasticity  of  issue,  in  order  to  cope  with  crises.     What, 
in  fact,  is  needed  at  these  difficult  moments?    More  cur- 
rency than  in  normal  times.     Who  can  supply  it?    A 
bank  issuing  bills  against  reliable  securities,  such  as  com- 
mercial effects.     It  is  these  effects  that  must  be  coined  mtp 
money  and  made  to  circulate,  until  calmer  days  amve. 

It  must  be  added  that  in  France  the  "portfolios"  of 
commercial  biUs  of  the  credit  companies  are  composed  of 
good  paper,  giving  very  few  losses.  This  is  evidently 
also  one  of  the  necessary  conditions  if  the  Bank  of  France 
is  to  fulfil  its  r61e  without  risk  and  maintain  its  credit— 
the  credit  of  the  bank  note. 

It  may  be  easily  seen  that  the  Bank  of  France  is  the 
center  of  the  credit  organization  of  France.  It  is  its 
special  constitution  such  as  a  historical  evolution  has  made 
it  which  has  in  some  sort  determined  the  development 
of  the  credit  companies  and  of  banks  in  France.  If  to 
this  is  joined  the  peculiarly  prudent  and  economical  char- 
acter of  the  French,  their  fondness  for  saving,  it  will  be 
easy  to  understand  the  influence  of  surroundings  on  the 
workings  and  methods  of  the  credit  companies. 

216 


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^^- 


( 


( 


/ 


Chapter  V. — The  credit  companws  and  the  local  hanks. 

The  numerous  agencies  of  the  credit  companies  compete  with  the  local  banks.— 
The  Paris  banks  are  little  affected.— It  is  hard  to  estimate  the  eiact  number  of  the 
local  banks  and  the  importance  of  their  affairs.— First  grouping.— Advantages  the 
local  banks  claim  to  offer.— Unjust  criticism.— The  real  crisis  of  the  local  banks.— 
Solutions  of  the  problem.— A  central  bank  is  established  in  Paris.— Sale  of  securi- 
ties.—District  banks.— The  present  moment  is  a  period  of  transition  for  the  local 
banks. 

The  development  of  the  credit  companies,  of  their 
agencies  and  operations,  was  not  accompHshed  without 
creating  a  sort  of  latent  crisis  among  the  local  banks.  It 
is  a  question  here  of  the  banks  of  provincial  cities  with 
which  the  credit  companies  came  to  compete  on  their  own 
groimd.  The  Paris  banks,  having  been  long  established, 
were  not  particularly  affected  by  the  extension  of  the 
agencies  of  the  credit  companies  in  the  capital.  Some 
carry  on  transactions  known  as  "high  finance" — partici- 
pation in  state  loans,  issues  of  industrial  securities,  etc.; 
others  are  banks  of  commerce,  having  each  its  own 
patrons,  answering  needs  and  rendering  services  to  which 
they  are  adapted.  In  the  first  group  may  be  mentioned 
the  Mallet  Bank,  which  was  founded  in  the  first  half  of 
the  eighteenth  century,  the  Hottinguer  Bank,  etc. 
Among  the  second  are  the  bank  of  Offron,  Ginard  &  Co., 
founded  in  1817;  the  one  imder  the  firm  name  of  Henrotte 
&  Muller,  created  in  1823;  the  Lehideux  Bank,  which 
goes  back  to  1835;  the  Claude,  Lafontaiije,  and  Fouchet 
banks,  etc. 

It  is,  then,  the  provincial  banks  which  have  really  suffered 
from  competition  with  the  credit  companies.     These  owed 


217 


W  li 


I 


[ 


Ul 


National      Monetary      Commission 

the  depression  they  experienced  to  other  concomitant 
causes  also,  and  to  the  necessity  of  making  changes  in 
their  mode  of  work.  Improved  means  of  communication, 
the  extension  of  the  railroad  system,  the  telegraph  and 
telephone,  have  contributed  to  make  more  efltective,  even 
in  the  most  remote  towns,  the  regulating  and  leveling 
action  of  the  law  of  supply  and  demand  in  the  matter  of 
capital. 

What  is  the  number  of  these  provincial  banks?  It  is 
rather  difficult  to  tell.  The  only  way  of  approximating 
it  is  by  the  licence  tax  they  pay.  But  here  again  one  must 
make  distinctions — the  tax  is  greater  or  less  according  as 
they  are  bankers  or  discounters.  The  number  of  dis- 
counters is  probably  greater.  It  may  be  estimated  at 
about  1,200;  the  number  of  private  bankers  is  doubtless 
slightly  less — perhaps  1,000  or  1,100.  The  counting 
houses  and  loan  agencies  may  be  estimated  at  something 
like  a  hundred.  Finally,  other  establishments  make  a 
specialty  of  placing  transferable  securities.  They  seem 
to  have  increased  in  number,  and  may  be  roughly  esti- 
mated at  400.  There  are,  then,  from  2,700  to  2,800  local 
banks  of  varying  importance,  ranging  from  the  little  dis- 
count bank  of  a  small  town  to  the  large  city  banks  with 
big  capital. 

A  certain  number  of  these  banks  have  formed  a  syndi- 
cate or  imion  to  protect  their  interests.  They  find  them- 
selves in  competition,  in  fact,  in  two  operations,  one  of 
which  has  been  much  extended;  the  agencies  of  the 
credit  companies  make  collections  at  a  much  lower  price 
than  that  formerly  charged  by  most  of  the  local  banks. 


218 


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» 


I 


* 


Evolution     of    Credit     and     Banks 

especially  the  ones  situated  in  third-class  towns;  thanks 
to  the  central  office  in  Paris,  the  credit  companies  are 
better  informed  and  better  situated  for  all  transactions 
on  the  Bourse.  The  result  is  that  the  operations  involv- 
ing the  most  risk  fall  to  the  local  banks — that  is  to  say, 
advancing  funds  for  a  silent  partnership  in  industrial 
enterprises  {commandite).  As  for  discount,  the  rate 
charged  by  the  agents  of  the  credit  companies  has  tended 
to  make  it  lower. 

For  the  rest,  we  are  summing  up  the  grievances  of  the 
local  banks  as  expressed  in  the  publications  on  the  sub- 
ject, and  the  reasons  put  forward  in  their  favor  by  their 
representatives : 

The  local  banker  belongs  to  the  neighborhood;  his 
family,  property,  and  interests  are  there.  He  cooper- 
ates in  aiding  local  commercial  or  industrial  under- 
takings. 

He  receives  as  time  deposits  the  fimds  of  the  land- 
owners, who  are  the  local  capitalists,  and  pays  them  good 
interest.  This  capital  he  can  again  use  as  a  silent 
partner  {commandite)  in  local  enterprises,  which  the 
credit  companies  are  not  willing  to  do. 

Knowing  the  local  credit  better  than  the  manager  of 
an  agency,  who  is  often  a  stranger  in  the  place,  the  local 
banker  can  give  personal  credit. 

In  a  local  bank  the  management  is  permanent;  the 
son  generally  succeeds  the  father,  or,  if  not,  the  son-in-law 
or  some  other  member  of  the  family. 

These  local  banks  claim  that  they  are  able  to  save 
expense  for  clients  in  the  business  they  do  with  them, 


219 


1 

IF 


'  I 


p:- 


'.Of 


'i     I 


t*'     f: 


National      Monetary      Commission 

because  their  profits  consist  of  the  difference  between  the 
interest  they  pay  depositors  or  clients  who  are  their 
creditors,  and  the  interest  they  receive  on  discounts, 
loans,  etc.  (This  argument  does  not  quite  agree  with 
the  facts,  because  in  the  case  of  many  operations  the 
credit  companies  have  brought  rates  down.) 

In  the  terms  relating  to  accounts  they  claim  to  offer 
more  stability  than  would  be  possible  for  the  manager 
of  an  agency,  who  receives  instructions  from  the  central 
office  of  his  company. 

The  credit  companies  centralize  capital  at  Paris  in  order 
to  use  it  for  "carry-overs"  (contangos),  etc.  In  this  way 
speculation  in  negotiable  securities  receives  more  encour- 
agement than  commerce  and  industry. 

The  local  banks  divide  the  risks;  one  of  them  may  go 
under  or  suspend  payments  without  affecting  anything 
but  the  local  market,  while  if  a  credit  company  should 
fail,  it  would  involve  as  many  markets  as  it  has  agencies. 

Finally,  certain  aggressive  writers  have  accused  the 
credit  companies  of  investing  French  capital  in  foreign 
securities.  Now,  we  have  seen  that  this  exodus  was 
made  necessary  by  the  large  amount  of  unemployed 
capital ;  this  use  of  French  capital  is  besides  of  the  greatest 
economic  and  financial  aid  to  our  country.  The  income 
on  the  thirty-odd  billion  francs  that  we  hold  in  foreign 
investments  establishes  a  balance  of  exchange  very 
favorable  to  France.  This  makes  it  possible  for  the  Bank 
of  France  to  possess  and  maintain,  even  in  crises,  a  large 
gold  reserve — at  this  moment  more  than  3,500,000,000 
francs — and,  in  short,  it  faciUtates  commercial  relations, 


220 


Evolution     of    Credit     and     Banks 

extends  French  influence,  and  sometimes  paves  the  way 
for  political  understandings. 

Nevertheless  the  crisis  existed,  and  after  criticisms 
and  recriminations  came  investigations  of  ways  to  meet 
the  difficulties.  Naturally,  too,  by  reason  of  the  evolu- 
tion of  the  organization  of  credit  in  France,  certain  solu- 
tions were  suggested  by  the  facts.     We  shall  state  them 

briefly. 

In  the  beginning,  a  great  number  of  local  and  pro- 
vincial bankers  came  together  and  formed  a  union  for 
the  purpose  of  considering  means  of  defense.  The  first 
aim  was  to  bind  together  the  various  members  of  this 
union  in  common  business  relations  and  to  estabHsh  in 
Paris  a  credit  concern  which  was  to  centralize  provincial 
operations  on  the  capital  at  moderate  rates,  and  was 
also  to  try  to  procure  its  share  in  the  great  issues  of  securi- 
ties, in  order  to  give  its  provincial  correspondents  the 
benefit  of  them  and  allot  to  each  one  his  share  of  sectuities 
to  dispose  of. 

This  solution  resulted  in  practice  in  the  founding  at 
Paris  of  the  Societe  Centrale  du  Syndicat  des  Banques 
de  Province,  which  now  goes  under  the  name  of  the 
Societe  Centrale  des  Banques  de  Province.  It  dates  from 
1905,  and  has  a  capital  of  1,185,000  francs.  Its  provin- 
cial correspondents  are  the  members  of  the  syndicate  of 
provincial  banks,  from  320  to  330  in  number.  Together 
with  the  branch  offices  of  certain  of  these  banks,  they 
represent  about  368  agencies  open  for  issuing  and  market- 
ing transferable  securities.  Among  the  operations  in 
which  it  engages,  this  one  seems  to  be  the  most  important. 


221 


I 


pi  J  ■   I 


i;, 


I 


National    Monetary     Commission 

It  has  a  safety -deposit  service  and  transacts  other  bank- 
ing operations,  but  is  apparently  for  the  most  part  an 
investment  bank.  Will  it  persist  in  this  course  to  the 
point  of  entering  as  a  silent  partner  into  industrial 
enterprises  (commandite)  ?  Will  it  be  an  organ  for  trans- 
forming or  aiding  the  medium-sized  or  small  local  indus- 
tries? It  is  difficult  to  give  an  opinion  on  this  point, 
because  the  association  dates  only  from  1905.  This  last 
function,  relating  to  local  industries,  has  been  and  still 
is  one  of  the  data  of  the  problems  raised  by  the  local  or 
provincial  bankers. 

A  movement  entirely  different  from  this  one  has  been 
started  in  certain  parts  of  the  country.  Several  very 
important  local  banks,  which  enjoy  the  confidence  of  the 
region  where  they  operate,  have  extended  their  radius  of 
activity  and  formed  veritable  district  credit  companies. 
They,  too,  have  agencies  and  branch  offices  and  solicit 
patronage.  As  the  bankers  or  managers  of  these  societies 
live  in  the  locality  and  are  deeply  rooted  in  it,  they  are 
well  acquainted  with  the  geography  of  credit,  the  progress 
of  industries,  and  the  trend  of  local  business.  During  the 
crisis  which  raged  in  the  Lyons  silk  market  in  1907-8  the 
Lyons  bankers  were  of  great  assistance  to  the  merchants, 
and  saved  many  failures.  Lyons,  we  should  add,  counts 
many  experienced  bankers  of  the  first  order. 

But  it  is  especially  in  the  north  that  the  widening  out 
of  local  banks  into  district  banks  or  agencies  has  taken 
place.  Among  these  should  be  named  the  bank  of  Verley 
Decroix  &  Co.,  with  headquarters  at  Lille,  which  possesses 
27  branch  offices  in  the  Departments  of  Nord  and  Pas-de- 


222 


( 


Evolution     of    Credit    and     Banks 

Calais;  the  Devilder  bank,  which  has  9  branches  and 
is  also  located  at  Lille;  the  Varin-Bemier  Bank  at  Bar-le- 
Duc,  which  has  10  agencies.  In  these  regions  of  the  north 
and  east  are  grouped  the  metallurgic  industries  and 
factories.  In  the  southwest,  too,  at  Bordeaux,  must  be 
mentioned  the  Bank  of  Bordeaux,  which  has  7  agencies 
in  the  region  (Angouleme,  Bergerac,  Blaye,  Libourne, 
Royan,  Ste.  Foy  la  Grande,  and  Sarlat).  Moreover,  it 
has  an  agency  in  Paris,  3  district  offices  in  Bordeaux,  and 
18  auxiUary  offices  in  the  surrounding  region. 

The  local  or  provincial  banks  in  France  are,  then,  in  a 
transition  state.  The  most  important  of  them  will 
probably  develop  into  district  banks;  other  still  smaller 
ones  will  gravitate  around  the  Soci6t6  centrale  des 
Banques  de  Province;  others  still,  licensed  as  discoimters, 
will  continue  in  a  Hmited  radius  to  discount  paper  for  the 
small  trade,  and  rediscount  it  at  the  Bank  of  France  if  it 
is  "bankable." 


223 


Evolution     of    Credit     and     Banks 


r 


Chapter  VI. — The  Bank  of  France — Renewal  of  its  prim- 
lege — Present  situation — Its  rdle  in  the  crisis  of  1906, 

Renewal  of  the  privQege,  law  of  November  17,  1897.— New  duration  of  the  privi- 
lege.—The  agricultural  syndicates  and  discount.— Incompatibility  of  the  duties  of 
governor  and  deputy  governor  with  all  legislative  authority.— Operations  for  the 
benefit  of  the  Treasury.— Extension  of  the  number  of  branch  offices.— Profits  above 
5  per  cent  shared  with  the  State.— The  maximum  of  issue  is  extended.— Falling  off 
In  the  commercial  discounts  of  the  Bank  of  France  from  1880  to  1896.— The  extension 
of  business  in  1899-1900  and  the  demand  for  gold.— The  Bank  of  France  discounts 
English  commercial  paper.— Necessity  for  a  bank  of  issue  to  have  the  right  to  dis- 
count foreign  paper.— The  solidarity  between  banks  of  issue  of  various  countries 
Is  established  naturally  by  the  action  of  the  law  of  supply  and  demand,  and  by  the 
course  of  international  business  affairs.— State  royalties.— Royalties  paid  by  the 
Bank  to  the  State.— Taxes  on  bank  notes.— Remarks  on  the  revenue  of  the  Bank 
of  France.— The  revenue  from  discounts  is  encumbered  with  heavy  expenses. — 
Advantages  of  revenue  on  loans.— Royalties  and  taxes  compared  to  the  total  ex- 
penses. 

We  left  the  Bank  of  France,  above,  at  the  moment  when 
it  intervened  in  189 1  in  the  matter  of  the  suspension  of  the 
Soci^te  des  Ddp6ts  et  Comptes  Com-ants.  From  this  time 
on,  imtil  the  renewing  of  its  charter  in  1897,  nothing  hap- 
pened particularly  worthy  of  note.  It  may  be  observed, 
however,  that  the  gold  reserve  had  a  tendency  to  increase, 
and  likewise  the  circulation  of  notes,  as  may  be  seen  by  the 
following  table,  which  gives  the  average  totals  of  the  com- 
mercial discoimts  and  the  loans: 

[Million  francs.] 


Year. 


X891 

1892 

1893 

1894-*- 

1895 

1896 - 

X897 


Reserve. 


Gold. 


1,379. 1 
1.5474 
1.684.8 
I, 831. o 

2.047.9 
1.978.0 
1,962.  7 


Silver. 


i.aS4.7 

1. 279. 1 

1. 271. 2 
I, 262. 7 
1.243-7 
1.244-4 
I, 222. O 


Total. 


2,553-8 
2.826.5 
2.956.0 
3.083.7 
3.291.6 
3.222.4 
3,184.7 


Circula- 
tion of 
bank 
notes. 


3.084.6 
3.151-3 
3.445-5 
3.476.5 
3.526.6 
3.607.0 
3.687.0 


Dis- 
counts. 


760.  7 

550.4 

579 

564 

543 

693 

730 


Loans 
on  secu- 
rities. 


298.4 
296.9 
302.8 
290.8 
312.0 

363.7 
358.0 


224 


( 


The  rate  of  discount  bears  witness  to  the  calm  of  this 
period,  and  the  cheapness  of  capital.  The  following  table 
shows  this  clearly : 


Discount  rate. 


Year. 


1891. 
1892. 
1893- 
1894- 
1895- 
1896. 

1897- 


Maxi- 

Mini- 

mum. 

mum. 

Per  cent. 

Per  cent. 

3.0 

3.0 

3.0 

2.5 

2-5 

2.5 

2.5 

2.5 

2.5 

3.0 

2.0 

2.  0 

2.0 
2.  0 

Average. 

Per  cent. 
3.00 

2.  70 

2.  50 

2.5« 

2.  10 

3.  00 
3.  00 


The  law  of  June  9,  1857,  had  renewed  the  privilege  of 
the  Bank  for  thirty  years,  until  December  31, 1897.  This 
law  had  been  made  more  than  ten  years  before  the  lapsing 
of  the  privilege,  which,  by  the  law  of  June  30,  1840,  had 
been  prolonged  until  1867.  This  time  they  waited  much 
later,  since  the  law  renewing  the  privilege  again  was  pro- 
mulgated on  November  17,  1897,  not  a  month  and  a  half 
before  the  old  privilege  expired. 

We  will  note  here  nothing  but  the  special  new  points  of 
this  law,  the  official  text  of  which  is,  besides,  a  current 
document.     For  this  we  will  follow  the  order  of  its  articles. 

The  privilege  is  prolonged  for  twenty-three  years,  end- 
ing December  31,  1920;  however,  a  law  passed  by  both 
Chambers  may  bring  the  privilege  to  an  end  on  December 

31,  1912. 

The  agricultural  syndicates,  whose  legal  existence  dates 
from  the  law  of  1884,  will  be  able  henceforth  to  discount  at 


/ 


1971 — 10 15 


225 


National    Monetary    Commission 


Evolution     of    Credit     and     Banks 


I  ' 


i: 


the  Bank  paper  at  a  maximum  maturity  of  three  months, 
bearing  the  signatures  of  their  representatives. 

The  duties  of  governor  and  deputy  governor  of  the  Bank 
were  becoming  incompatible  with  a  seat  in  the  legislattu-e. 
Senator  Magnan  had  to  resign.  He  was  replaced  by 
M.  Georges  Pallain,  who  had  been  one  of  the  most  emi- 
nent collaborators  of  L^on  Say  in  the  Ministry  of  Finance, 
and  left  the  post  of  Inspector-General  of  Customs  to  assume 
the  governorship  of  the  Bank,  which  he  still  holds. 

A  change  which  was  new  in  its  tendency  was  that  the 
Bank  from  1897  to  1920,  inclusive,  must  hand  over  to  the 
State  twice  each  year  a  royalty  equal  to  the  proceeds 
of  one-eighth  of  the  discount  rate  multipUed  by  the  total 
productive  circulation,  without  its  ever  being  less  than 
2,000,000  francs. 

The  state  loans  granted  by  the  Bank  in  those  previous 
agreements,  one  of  60,000,000  francs  at  3  per  cent,  the 
other  of  80,000,000  francs  at  i  per  cent,  or  140,000,000  in 
all,  ceased  to  pay  interest  to  the  Bank.  Henceforth,  these 
1 40,000,000  francs  advanced  to  the  State  cost  the  Treasury 
nothing. 

Moreover,  the  Bank  engaged  to  put  at  the  disposal  of 
the  State,  still  without  interest,  and  dining  the  whole 
continuance  of  the  privilege,  an  additional  40,000,000 
francs. 

The  Bank  was  compelled  to  make  gratuitously  a  certain 
number  of  transactions  for  the  benefit  of  the  Treasury: 
Payments  of  coupons,  issues  of  French  government 
seciuities,  collections  of  drafts  drawn  on  the  Treasury, 
etc. 


.j>. 


( 


This  law  provided,  besides,  that  branch  ofi&ces  should 
be  opened  in  all  the  departmental  capitals  not  yet  sup- 
plied with  them,  and  auxiUary  btu-eaus  were  also  to  be 
created. 

In  case  the  rate  of  discotmt  rose  above  5  per  cent,  the 
resulting  proceeds  must  be  deducted  from  the  sums  to  be 
divided  annually  among  the  shareholders:  A  quarter  is 
added  to  the  capital  of  the  company;  the  rest  reverts  to 
the  State.  This  case  has  not  arisen  even  in  the  crisis  of 
1906-7,  the  effects  of  which  made  themselves  felt  from 
the  United  States  upon  England,  and  from  England  upon 
France. 

The  limit  of  issues  of  the  Bank,  which  the  law  of 
January  28  had  fixed  at  4,000,000,000  francs,  was  carried 
to  5,000,000,000  francs. 

Finally,  the  Bank  is  bound  to  weigh  in  the  reserves  of  its 
branch  offices  and  auxiliary  agencies  and  to  transport  at 
its  own  expense  to  the  mint  the  light-weight  gold  pieces 
that  the  Minister  of  Finance  has  ordered  to  be  recoined. 

Under  the  prudent  and  skilful  direction  of  M.  Georges 
Pallain,  the  Bank  has  prospered  since  the  renewal  of  its 
privilege;  it  has  performed  with  unfailing  efficiency  the 
functions  for  which  it  has  been  fitted  by  historical  events. 
This  is  clearly  proved  by  the  following  facts: 

DISCOUNTS. 

After  1885  the  commercial  discoimts  of  the  Bank  had 
decreased.  In  1894  the  total  discoimts  of  the  Bank  had 
fallen  off  40  per  cent  in  comparison  with  those  of  1880. 
The  extension  of  discounting  operations  by  the  great 


226 


227 


1 


National    Monetary     Commission 

credit  societies  has  certainly  exerted  an  influence  on 
this  decrease,  which  was  mentioned,  besides,  in  the  ofl&cial 
report  of  the  operations  of  the  Bank  for  1894.  But  since 
1896,  as  we  have  aheady  seen  by  the  table  given  at  the 
beginning  of  this  chapter,  the  average  discounts  increased 
in  1896-97.  But  there  was  a  drop  in  190 1-2;  then  a 
recovery  in  1903,  reaching  in  the  panic  years  1907  and 
1908  the  respective  sums  of  13,900,000,000  and  15,700,- 
000,000  francs. 

We  give  in  the  following  table  the  siun  total  of  annual 
discounts,  and  their  average  total,  beginning  with  1897, 
as  well  as  the  maximmn,  minimum,  and  average  rate  of 
discoimt : 

[Million  francs.] 


Evolution     of    Credit     and     Banks 


Year. 


1897 
1898 

1899 
1900 
1901 
1902 
1903 
1904 
1905 
Z906 
1907 
Z908 


Sum  total 
discounts. 

Average 
discounts. 

10,364.8 

730.4 

11.033. 1 

797-8 

II,  746.0 

828.3 

la, 347-6 

875-3 

9.936.3 

592.4 

9.SSS-9 

546.3 

II.  685.0 

688.0 

10,834.3 

699.6 

10,967.6 

640.  6 

13.980.9 

897.7 

15. 769.0 

I. 135.7 

za,8oo.  6 

897.3 

Rate  of  discount. 


Maxi- 

Mini- 

mum. 

mum. 

Per  ct. 

Perct. 

3.0 

a 

3 

0 

a 

4 

5 

3 

4 

5 

3 

3 

0 

3 

3 

0 

3 

3 

0 

3 

3 

0 

3 

3 

0 

3 

3 

0 

3 

4 

0 

3 

4 

0 

3 

Aver- 
age. 


Per  ct. 
3.  00 

3.  30 

3.06 
3-35 

3  00 
3.00 
3.00 
3.00 
3- 00 
3.00 

3.45 
3- 04 


\ 


The  modifications  of  the  rate  of  discount  after  1898 
may  be  seen  more  in  detail  in  the  following  table.  Added 
to  it  are  the  rates  on  loans. 


•;> 


? 


T 

\ 


1898 — December  3_ 

1899 — December  7. 
December  2 1 . 

1900 — ^January  ii__ 
January  25.  _ 
May  25 

1907 — ^January  17-. 

March  3  z 

November  7. 

1908 — ^January  9 

January  23 .  _ 
May  29 


Dis- 
count. 

Loans. 

Per  ct. 

Perct. 

3.0 

3-S 

3 

5 

4.0 

4 

5 

5.0 

4 

0 

4.5 

3 

5 

4.0 

3 

0 

35 

3 

0 

4.0 

3 

5 

40 

4 

0 

4.5 

3 

S 

4-5 

3 

0 

4.0 

3 

0 

35 

It  will  be  noticed  that  in  1899  the  discount  rate  rose 
to  3.5  per  cent,  then  to  4.5  per  cent,  and  the  rate  of  loans 
to  4  per  cent  and  5  per  cent ;  the  4  per  cent  discount  rate 
and  that  of  4.5  per  cent  for  loans — which  were  still  above 
normal — were  maintained  until  January  11,  1900.  Now, 
at  the  end  of  1899,  the  discount  rate  was  7  per  cent  at 
the  Imperial  Bank  of  Germany,  and  6  per  cent  at  the 
Bank  of  England.  Business  had  extended  greatly  since 
1898.  French  capital  was  in  demand  abroad.  The  Bank 
of  France,  in  the  presence  of  this  increasing  demand, 
raised  the  discount  rate  to  4K  P^^  cent,  a  rate  that  had 
not  been  charged  since  1888-89  at  the  time  of  the  failure 
of  the  first  Comptoir  d'Escompte. 

The  increase  in  the  discount  rate  in  March,  and  again  in 
November,  1907,  was  brought  about  by  a  crisis  caused 
by  the  tightness  of  money,  originating  in  the  New  York 
market.  This  crisis  was  first  felt  in  1906  in  the  United 
States.  A  latent  crisis,  not  very  serious  however,  was 
already  making  itself  felt  in  the  markets  of  Europe.    That 


338 


229 


l1 


1 


National    Monetary     Commission 

of  the  United  States  rendered  it  much  more  acute. 
The  London  market,  being  in  constant  relations  with 
that  of  New  York,  was  first  affected  by  the  situation. 
The  discount  rate  in  London  was  raised  to  6  per  cent. 
But  this  barrier  was  not  enough  to  check  the  flow  of  gold 
to  places  where  it  was  needed,  and  greatly  needed. 

To  defend  its  reserve  the  Bank  of  France  could  use 
the  normal  expedient  of  raising  the  discount  rate;  it  did 
not  do  this  in  1906,  but  had  recourse  to  another  equally 
normal  expedient  which  the  situation  clearly  demanded; 
it  discotmted  EngUsh  paper,  and  so  made  it  possible  for 
the  London  market  to  procure  the  capital  necessary  to 
alleviate  its  current  crisis.  This  is,  in  fact,  a  proceeding 
which  is  much  more  economic,  in  the  high  sense  of  the 
word,  than  the  rather  archaic  one  practiced  formerly  of 
making  discreet  loans  of  gold  to  the  Bank  of  England. 
In  the  following  year,  1907,  the  crisis  grew  worse.  Dis- 
count at  the  Bank  of  France  went  up  again  to  3X  per 
cent  and  then  to  4  per  cent.  The  Bank  of  France  inter- 
vened a  second  time,  discounting  English  paper.  The  re- 
port of  the  operations  of  the  Bank  for  1907  states  that  in 
this  way  a  ready  capital  of  more  than  80,000,000  francs  in 
American  gold  was  furnished  to  the  London  market.  In 
another  direction,  the  Bank  of  France  opposed  no  obstacle 
to  the  shipments  of  French  gold  to  New  York,  which 
were  furthered  by  the  Bank's  making  its  normal  com- 
mercial discounts.  Finally,  the  discoimt  rate  remained 
3  per  cent  lower  in  France  than  in  England  or  Germany. 

In  this  way,  the  action  of  the  Bank  made  itself  felt, 
not  only  on  the  French  market  but  also  on  the  inter- 


I 


f 

{ 


Evolution     of    Credit     and     Banks 

national,  and  particularly  the  English  market.  Making 
discounts  on  foreign  paper  must  be  considered,  to-day, 
a  very  normal  means  of  establishing  useful  relations 
between  the  different  markets,  and  of  applying  the  law 
of  supply  and  demand  of  capital  in  an  intelligent  and 
profitable  manner  for  the  country  which  furnishes  its 
capital.  Not  making  foreign  discounts  is  a  deficiency 
which  the  Bank  of  England  adds  to  its  lack  of  elasticity 
of  issue.  The  Reichsbank  has  a  foreign  "portfoUo" 
which  has  increased  in  importance  from  year  to  year. 
The  Bank  of  France  has  the  right  to  discount  foreign 
paper,  and  has  used  it  very  ably,  thanks  to  the  enlightened 
direction  of  its  governor,  M.  Georges  Pallain. 

This  proves  that  the  alliance  of  all  the  banks  of  issue 
of  Europe,  which  a  former  ItaUan  minister  proposed  to 
estabUsh  some  time  ago,  an  alliance  prepared  by  the 
Governments  with  the  idea  of  ending  in  a  final  consortitun 
of  these  banks,  is  not  only  useless  but  dangerous.  There 
is  no  need  of  official  intervention,  of  contracts  with  bind- 
ing clauses,  to  create  a  soUdarity  between  these  estab- 
lishments. This  solidarity  is  established  when  necessary, 
either  directly,  if  the  banks  of  issue  have  the  privilege 
of  discounting  foreign  commercial  paper,  or  indirectly, 
by  the  credit  companies  or  the  intermediary  banks. 
The  intervention  of  one  or  another  of  the  banks  of  issue 
in  favor  of  a  foreign  market  is  therefore  free,  and  so 
much  the  more  useful  on  that  account,  because  this 
action  is  performed  in  response  to  a  solidarity  dictated 
by  the  positive  interest  that  the  bank  has  in  intervening, 
since  it  derives  profit  from  so  doing.     But  it  can  not  be 


230 


231 


.^|i 


r 

■I 
1] 


i; 


1*  I 


National    Monetary     Commission 

repeated  too  often — the  right  of  making  foreign  com- 
mercial discounts  is  to-day  imdeniably  useful  for  a  bank 
of  issue. 

According  to  the  law  of  November  17,  1897,  renewing 
the  privilege  of  the  Bank  of  France,  this  establishment 
owed  a  royalty  to  the  State  equal  to  the  proceeds  of  one- 
eighth  of  the  discount  rate  multiplied  by  the  total  of  the 
productive  circulation,  the  payment  not  to  amount  to  less 
than  2,000,000  francs.  The  average  of  productive  circula- 
tion is  calculated  by  the  decree  of  June  24,  1878.  In  mak- 
ing this  estimate  a  statement  is  made  out  for  each  working 
day,  for  Paris  as  well  as  the  branches,  of  the  debit  bal- 
ance under  the  following  heads:  Discounts;  loans  on 
securities,  on  gold  and  silver  bullion;  notes  payable  to 
order,  and  in  circulation.  This  statement  is  added  up 
and  then  divided  by  the  number  of  working  days,  thus 
obtaining  the  average  productive  circulation  of  the  Bank 
for  the  year.  Here  is  the  table  of  royalties  paid  by  the 
Bank  to  the  State  since  the  law  of  1897: 

Francs. 

1897 _ 2,  742,  CXX) 

1898 3.343.000 

1899 4,857,000 

1900 5.655.000 

1901 4,  107,000 

1902 3,777,000 

1903 4,314,000 

1904 _ __-  4,521,000 

1905 4,225,000 

1906 5.333.000 

1907 7.357,000 

1908 - ---  5.538.000 

The  Bank  pays  the  State,  in  addition  to  this,  a  stamp 
tax  on  the  circulation  of  its  notes.     For  the  assessment 


232 


/ 


^^ 


Evolution     of    Credit     and     Banks 

of  this  tax  a  distinction  is  made  between  the  productive 
and  unproductive  circulation.  The  first  is  subject  to  a 
tax  of  0.50  franc  per  1,000,  the  second  to  a  tax  of  0.20 
franc  per  i  ,000. 

This  stamp  tax,  paid  by  installments,  was  1,404,632 
francs  in  1908.  The  unproductive  circulation  of  the 
Bank  is  very  high.  About  two-thirds  of  this  circulation 
represents  metallic  reserves  of  gold  and  silver.  If  to  the 
stamp  tax  on  the  notes  are  added  printing  and  book- 
keeping expenses  for  these  notes,  the  total  probably 
exceeds  2,000,000  francs  a  year. 

The  Bank  of  France  has  three  great  sources  of  revenue: 

(i)  Revenue  from  discounts;  (2)  revenue  from  loans 
on  securities;  (3)  accrued  interest  on  securities  held  by 
the  Bank. 

In  addition,  certain  other  minor  revenues  are  given  under 
the  heading  **  miscellaneous  "  in  the  following  table: 


Revenue. 

1906. 

1907. 

1908. 

Discounts 

Francs. 
27.998,000 

18, 256, 000 

10, 302, 000 

4, 188,000 

Francs. 
39. 523.000 

23.320,000 

10,436,000 

3,904, 000 

Francs. 
27. 935. 000 

20,677.000 

10,646,000 

4,242,000 

Loans  on  securities 

Accrued  interest 

Miscellaneous 

TotaL 

60, 744, 000 

77. 183,000 

63.500,000 

The  importance  of  revenue  from  loans  on  securities 
will  be  noticed  here.  This  revenue  entails  much  less 
expense  than  the  revenue  from  discoimt.  Discount 
requires  a  whole  army  of  collecting  clerks,  in  Paris  as 
well  as  in  the  branch  offices  and  bureaus.  In  order  to 
collect  bills  the  debtor  has  to  be  visited  at  his  place  of 


233 


r.Ti 


National    Monetary     Commission 

business  or  residence.  In  the  case  of  loans  on  securities 
it  is  the  debtor  who  brings  what  he  owes  to  the  windows 
of  the  bank.  If  to  the  revenue  of  loans  on  sectu-ities  are 
added  the  accrued  interest  (arrerages)  it  will  be  seen 
that  these  two  represent  very  nearly  half  the  revenue  of 
the  Bank,  and  certainly  more  than  half  the  profits,  inas- 
much as  the  accrued  interest  costs  nothing  but  the  safe- 
keeping of  these  securities,  and  the  expenses  of  loans  on 
securities  are  much  less  than  on  discotmts. 

Here  is  the  comparison  of  the  expenses  of  the  Bank 
of  France  and  the  royalties  and  taxes  paid  to  the  State. 
The  taxes  in  the  total  given  here  include  not  only  the 
stamp  tax  on  the  bank  notes,  but  also  the  stamp  tax  on 
shares,  and  the  4  per  cent  tax  on  the  interest  on  loans  to 
the  companies,  plus  the  direct  taxes. 


Royalties  and  taxes  paid  to  State- 
Total  expenses 


1906. 


Francs. 
8. 721,000 

26.574,000 


1907. 


Francs. 
11,083,000 

30. 998,000 


1908. 


Francs. 

9. 131,000 

38, 604, 000 


It  is  therefore  about  a  third  of  the  expenses  that  are 
represented  by  the  payments  turned  over  to  the  profit  of 
the  State  by  the  Bank. 


234 


i 


/ 


f 


GENERAI.   CONCLUSIONS. 

First  period:  The  slow  and  difficult  conquest  of  its  complete  privilege  by  the  Bank 
of  France.— Second  period:  Period  of  transition.  Tbe  beginnings  of  the  credit 
system.— The  development  of  the  credit  companies  and  their  increasing  impor- 
tance. Rapidadaptationtosurrotmdings.- RAleof  theBank.  It  is  the  mainstay  of 
the  credit  organiiation  of  France. 

The  conclusions  arising  from  this  account,  in  which  we 
have  tried  to  present  the  principal  facts  of  the  evolution 
of  the  banks  and  credit  in  France  since  1800,  may  be 
svunmed  up  as  follows: 

In  the  first  period,  of  which  our  first  part  treats,  we  see 
the  Bank  of  France  modest,  at  its  beginnings,  in  spite  of 
the  determination  of  Napoleon  I  to  make  it  a  state  bank, 
gradually  freeing  itself  from  this  compromising  function. 
The  escape  from  this  danger  was  due:  First,  to  its  regents, 
who  were  experienced  bankers  or  merchants;  second,  to 
the  wisdom  of  two  of  Napoleon's  ministers,  MoUien  and 
Gaudin.  The  Bank  became  in  this  way  the  bankers* 
bank,  the  bank  of  rediscount  which  it  has  since  remained. 
It  profited  by  the  tendencies  of  its  founder.  Napoleon,  to 
obtain  the  exclusive  privilege  of  issuing  bank  notes  in 
Paris.  It  passed  successfully  through  formidable  poHtical 
crises;  saw  several  changes  of  government.  Little  by 
little  new  inventions,  the  steam  engine  especially,  revo- 
lutionized industry.  Other  banks  of  issue,  called  depart- 
mental banks,  were  foimded.  They  lived  and  prospered  in 
spite  of  defective  corporation  laws ;  they  performed  local 
services  in  the  places  where  they  were  established.  Then 
came  the  crisis  of    1848.     The  Bank  of  France,  which 

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tinderstood  the  usefulness  of  foimding  provincial  comp- 
toirs,  and  already  had  several,  desired  to  extend  its 
activity.  The  Revolution  of  1848  made  it  possible  to 
realize  this  plan  as  a  result  of  a  series  of  rather  unforeseen 
circumstances.  An  unprecedented  panic  at  Paris  gave 
the  Bank  an  opportunity  to  make  energetic  and  wise 
decisions.  The  departmental  banks  disappeared  shortly 
after,  much  more  as  a  result  of  this  political  accident  than 
of  a  concerted  plan.  A  sole  bank  of  issue  was  produced  in 
France  as  a  result  of  a  revolution  whose  programme  was 
to  suppress  privilege. 

Until  then  the  Bank  of  France  had  been  especially  a 
local  bank,  the  bank  of  issue  for  Paris.  It  owes  to  the 
wise  and  prudent  banking  traditions  of  the  Paris  bankers, 
its  regents,  the  fact  that  it  has  remained  a  bank  of  redis- 
count. All  around  it,  industry,  progressing  rapidly, 
brought  into  existence  banks  of  speculation  and  invest- 
ment. The  Bank  of  France,  however,  joined  in  the  gen- 
eral movement  in  this  direction  only  with  prudence. 

The  second  period,  to  which  our  second  part  is  devoted, 

was  a  time  of  transition.    The  Bank  had  won  the  exclusive 

privilege  of  issue  for  the  whole  country;  it  was  only  from 

this  moment  that  it  was  properly  called  the   "Bank  of 

France."     It   became  the    center  and  mainstay  of  the 

credit  system  of  France.     The  crises  that  it  experienced 

were  less  severe  than  in  the  first  period.     It  grew  because 

wealth  in  general  was  increasing,  because  the  railroads 

encouraged  the  creation  of  capital,  especially  in  a  coimtry 

so  gifted  with  the  spirit  of  economy.     It  shared  the  ideas 

of  prudence  which  in  all  that  relates  to  saving  are  a  part 

of  the  French  character. 

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Evolution     of    Credit     and     Banks 

However,  in  these  ten  or  twelve  years,  years  of  incuba- 
tion, legislation  on  corporations  became  more  liberal ;  the 
laws  of  1863  and  1867  gave  better  facilities  for  founding 
great  industrial  and  commercial  credit  companies.  The 
concentration  of  capital  must  be  made  to  correspond  to  the 
concentration  of  industries  that  results  from  new  inven- 
tions. This  is  a  mathematical  function  of  an  economic 
movement.  Then  new  credit  companies  were  founded, 
which  felt  their  way  for  a  while,  at  a  time  when  one  of 
them,  the  Comptoir  d'Escompte,  produced  by  the  events 
of  1848,  had  in  its  origin  the  form  of  the  credit  companies 
of  the  future.  Founded  for  the  purpose  of  acting  as  an 
intermediary  between  merchants,  manufacturers,  etc.,  and 
the  Bank  of  France,  it  was  the  first  bank  which  achieved 
the  aim  of  the  Bank  for  the  public.  The  war  of  1 87 1  turned 
aside  this  development  for  a  time,  or  at  any  rate,  pre- 
cipitated it.  The  terrible  events  which  took  place — the 
defeat  of  France,  the  payment  of  the  war  indemnity,  the 
great  loans,  the  great  works  for  the  extension  of  the  eco- 
nomic plant  of  the  country — produced  still  more  credit 
companies,  which  did  not  reach  over  a  wide  area,  banks 
which,  although  they  engaged  in  operations  of  commercial 
banking,  also  took  part  in  loan  operations,  made  invest- 
ments, etc.,  and  that  extensively. 

Finally,  in  the  third  period,  the  methods  of  the  credit 
companies  became  more  clearly  defined.  They  gradually 
extended  their  activity  in  France  by  means  of  numerous 
branch  ofl&ces  or  agencies.  The  Bank  of  France  followed 
the  same  movement,  either  of  its  own  accord  or  by 
reason  of  conditions  imposed  by  the  Government.     The 


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present  organization  of  credit  began  to  take  shape;  the 
r61e  of  the  credit  companies  grew  in  importance;   they 
adapted  themselves  to  the  temper  of  the  country  and  of 
their  depositors ;  they  engaged  preferably  in  discounting,  in 
short-date  operations;  they  made  every  effort  to  render 
available  by  means  of  suitable  investments  the  capital 
entrusted  to  them,  which  they  received  at  sight  in  much 
greater  amounts  than  on  time.     Finally,  they  took  root  on 
foreign  soil  and  helped  to  invest  French  capital  (which 
would  be  idle  in  France)  in   foreign  securities.     France, 
always  economical,  invested  abroad  in  this  way  savings  to 
the  amount  of  some  thirty-odd  billions.     This  situation 
made  France  a  creditor  of  many  nations  and  gave  it  ahnost 
constantly  a  favorable  exchange  rate.     It  made  it  possible 
for  the  Bank  of  France,  thanks  to  the  prudent  monetary 
policy  maugurated  by  I^on  Say,  to  accumulate  a  for- 
midable gold  reserve.     The  Bank  of  France  thus  became 
a  center  of  supply,  not  only  for  the  credit  of  France,  but 
for  the  important  neighboring  market  of  London. 

Financial  methods,  too,  had  gradually  been  perfected. 
The  Bank  no  longer  had  recourse  to  the  premium  on  gold; 
although  it  lent  the  Bank  of  England  directly  a  few 
years  ago  a  large  sum  in  gold,  it  was  able  recently  to  come 
to  its  aid  economically  by  discounting  English  paper. 

So,  as  we  have  often  said  in  this  study,  in  reality,  the 
organization  of  the  credit  system  of  a  country  always 
adapts  itself  more  or  less  to  surrounding  conditions.  In 
France  this  adaptation  has  been  taking  place,  especially 
in  recent  tunes,  more  rapidly  than  would  have  seemed 
possible  thirty  years  ago. 


,f 


Evolution     of    Credit     and     Banks 

However,  there  are  still  several  gaps  in  the  organiza- 
tion of  credit  in  France,  and  they  are  due  precisely  to 
certain  of  these  surrounding  conditions.  Initiative  in 
founding  industries  and  boldness  in  planning  new  enter- 
prises and  new  outlets  for  capital  are  not  adequate  to  the 
needs  of  the  productive  power  of  the  country.  So,  our 
special  banks  for  advancing  funds  for  silent  partner- 
ships in  industrial  enterprises  (commandites)  axe  few  in 
number.  There  is,  to  be  sure,  one  great  concern,  the 
Banque  de  Paris  et  des  Pays-Bas,  which  is  working  in  this 
field,  conforming  to  the  principle  of  the  division  of  labor  and 
of  risks,  exploiting  its  own  capital  and,  unlike  the  credit 
companies,  not  accepting  deposits,  which  latter  could  not 
properly  be  employed  by  this  company  for  the  operations 
in  which  it  engages.  It  does  business  on  a  large  scale  only, 
and  is  organized  for  that  purpose.  So,  it  seems  to  us, 
that  the  very  thing  we  lack  in  France  are  institutions  of 
this  same  kind,  which,  working  on  a  smaller  scale,  could 
perhaps  give  efficient  aid  to  the  transformation  or  creation 
of  middle-sized  industries. 


238 


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APPENDIXES. 


Appendix  I. — Note  on  the  Credit  Fonder  de  France. 

Two  systems  of  organizing  land  credit.— Historical  sketch.— The  Banque  Hypothft- 
caire,  1818-1846.— Bad  mortgage  laws  in  France  until  1852.— Founding  of  several 
companies  after  this  decree  of  February  28, 1852.— The  Credit  Foncier  de  Paris.— 
The  decree  of  December  10, 1852.  It  extends  the  privilege  of  the  CrMit  Foncier, 
and  authorizes  fusion  of  this  institution  with  the  others.— Influences  of  the  Crimean 
war,  1854-55,  bad  harvests,  and  issues  of  other  securities.— Administration.— Prin- 
ciple and  system  of  land  loans.— Securities  with  prizes.— Regular  automatic  amor- 
tizement by  the  periodic  drawing  of  a  certain  number  of  obligations.— Simple  mech- 
anism of  the  Crfedit  Foncier.— Should  a  land  credit  company  be  centralized?— The 
CrMit  Foncier  is  authorized  to  make  loans  to  towns,  etc.— Founding  of  the  Cr6dit 
Agricole  by  the  Credit  Foncier,  1861.— Bad  operations  of  the  Crfedit  Agricole.  It 
was  merged  in  the  Crfedit  Foncier  in  1876.— Capital.— The  Banque  Hypothtealre 
is  merged  with  the  Crfedit  Foncier.— Lowering  of  the  rate  of  interest.  The  CrMit 
Foncier  is  obliged  to  submit  to  conversions^  It  makes  conversions  on  its  own 
account.— Loans  to  private  individuals.— Town  loans.— Statistics  of  mortgage 
loans.— Issues  of  loans.    Rate  and  amortizement. 

I. 

The  organization  of  credit  on  real  estate,  the  introduc- 
tion of  deeds  on  landed  property  into  the  general  system 
of  paper  currency,  the  prompt  and  easy  negotiation  of 
these  deeds,  the  suppression  of  obstacles,  the  Hghtening 
of  the  burdens  which  encumber  landed  possessions,  are 
some  of  the  questions  which  have  most  occupied  the  public 
mind  for  sixty  years  back,  and  given  rise  to  the  most 
various  projects  and  schemes. 

Two  different  systems  came  under  consideration  at 
the  start:  Was  it  advisable  to  follow  the  German  plan 
of  forming  companies  of  borrowers,  that  is  to  say,  syn- 
dicates of  landowners  who  issued  certificates  of  liens 
and  left  to  those  of  their  number  who  desired  credit  the 


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National      Monetary       Commission 

task  of  placing  these  securities  and  realizing  on  them? 
Or,  was  it  better  to  form  companies  of  lenders  who  should 
borrow  on  their  own  credit  and  lend  to  the  private  indi- 
viduals who  applied  to  them?  The  latter  plan  was  pre- 
ferred. Lastly,  should  there  be  a  single  company  for  the 
whole  of  France?  Or,  rather,  was  decentralization  useful, 
and  was  it  better  to  foimd  a  certain  number  of  societies 
in  the  jurisdiction  of  various  courts  of  appeal?  After 
a  short  trial  of  the  latter  plan,  the  system  of  a  single 
society  was  adopted. 

This  development  was  rapid.  The  Bank  of  France  was 
fifty  years  in  gaining  its  exclusive  privilege  for  the  whole 
of  France;  the  estabhshing  of  the  land  bank  monopoly 
was  a  matter  of  something  less  than  two  years.  Central- 
ization has  always  been  the  rule  in  France;  it  belongs  to 
the  system  of  political  organization  which  concentrates 
everything  in  the  Capitol. 

Let  us  sum  up  briefly  the  evolution  in  France  of  the 
Credit  Foncier. 

The  first  mortgage  bank  in  France  was  founded  in  1818 
under  the  form  of  a  commandite  with  the  firm  name  of 
Deleuze,  Briot  &  Co.  It  became  a  joint-stock  company 
in  1820.  It  made  loans  for  twenty  years  at  4  per  cent 
plus  the  amortizement.  It  turned  over  to  the  borrower 
obligations  which  bore  a  fixed  interest  and  were  redeem- 
able one-twentieth  each  year.  It  collapsed  in  1848.  Its 
failure  was  the  result,  first,  of  bad  operations;  second,  of 
inadequate  mortgage  laws.  The  defects  of  these  laws 
were  (a)  the  absence  of  outer  forms  for  the  purpose  of 
making  the  transfer  of  property  rights  with  regard  to  a 


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Evolution     of    Credit     and     Banks 

third  person;  (6)  defective  registration  of  encumbrances, 
such  as  charges  for  water  rights,  right  of  way,  life  rent, 
use,  etc.;  (c)  defective  information  as  to  privileges  and 
legal  mortgages. 

To  Volowski  is  due  the  credit  of  bringing  about  the 
reform  of  this  legislation. 

An  important  decree,  issued  February  28,  1852,  pro- 
vided: 

1.  The  option  of  discharging  a  debt  by  annual  pay- 
ments. 

2.  Each  land  credit  association  must  have  territorial 
limits. 

3.  These  associations  have  the  right  to  issue  obligations 
or  certificates  of  liens. 

4.  They  can  make  loans  only  on  first  mortgages. 

5.  The  loan  must  not  exceed  half. the  value  of  the 
property. 

Expenses,— lAdiyivmum  interest,  5  per  cent;  amortize- 
ment, 2  per  cent  or  i  per  cent  of  the  total  of  the  loan; 
administration  expenses,  according  to  schedules  estab- 
lished by  the  statutes. 

Summary  procedure  in  favor  of  land  credit  concerns. 

Courts  can  not  grant  extension  of  time  for  the  payment 
of  annuities.  Payments  of  annuities  are  not  subject  to 
attachment.  The  land  credit  companies  may  foreclose 
on  the  property  by  filing  a  petition  with  the  presiding 
judge  of  the  civil  court,  within  fifteen  days,  at  the  expense 
of  the  debtor.  During  sequestration  the  land  credit  com- 
panies may  collect  any  profits  produced.  The  extensions 
of  time  for  foreclosure  are  shortened. 


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National      Monetary      Commission 

Several  land  credit  companies  were  founded  after  this 
decree,  but  not  without  difficulty.  They  had  as  oppo- 
nents the  notaries  who  were  then  in  the  habit  of  making 
all  mortgage  loans. 

A  great  association  was  founded  at  that  time  in  Paris, 
with  a  capital  of  25,000,000  francs;  it  got  together  by  sub- 
scription 10,000,000  francs.  Its  statutes  were  approved 
by  the  act  of  August  3,  1852.  It  took  the  name  of 
Banque  Fancier e  de  Paris,  or  Societe  de  Credit  Foncier. 
The  principal  bankers  of  Paris  were  its  stockholders. 

Other  associations  of  the  same  kind  were  founded  at 
Marseilles  and  Nevers.  Two  others,  at  Lyons  and  Tou- 
louse, were  on  the  point  of  obtaining  licenses  when  the 
decree  of  December  10,  1852,  was  issued.  This  decree 
extended  the  privilege  of  the  Credit  Foncier  to  all  the  de- 
partments where  institutions  of  this  kind  had  not  yet  been 
founded,  and  authorized  it  to  take  over  the  land  credit 
companies  of  Marseilles  and  Nevers.  The  Credit  Foncier 
de  Paris  then  changed  its  name  to  the  Credit  Foncier  de 
France.  In  reality  the  obligations  or  certificates  of  Hens  of 
the  land  credit  companies  of  Marseilles  and  Nevers  had  not 
been  placed  to  advantage.  They  were  new  securities  of 
a  special  kind,  and  the  pubUc  was  not  well  informed  about 
them.  The  same  thing  was  true,  besides,  of  the  Credit 
Foncier  de  Paris. 

This  concern  received  from  the  State  a  subsidy  of 
10,000,000  francs.  Its  guaranty  fimd  was  placed  at 
60,000,000  francs,  half  of  which  was  to  be  subscribed  at 
once.  It  imdertook  to  make  mortgage  loans  to  the  amoimt 
of  200,000,000  francs,  including  interest,  sinking  fund, 


-v^ 


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Evolution     of    Credit     and     Banks 

administration  expenses,  so  as  to  wipe  out  the  debt  in 
fifty  years. 

But  rigid  regulations  were  established,  based  on  mis- 
taken theories;  the  State,  or  at  least  the  ministers,  thought 
that  they  and  the  Credit  Foncier  together  were  strong 
enough  to  fix  at  will  the  interest  on  capital — ^a  false  notion, 
as  future  events  proved.  An  issue  of  a  loan  of  200,000,000 
francs  did  not  succeed  entirely.  Another  decree  was 
passed  (December  21,  1853)  modifying  the  5  per  cent 
rate  by  setting  up  a  movable  scale,  based  on  the  average 
market  price  of  government  3  per  cents. 

Operations  were  more  successful  after  this.  In  April, 
1854,  the  total  of  loans  realized  on  amounted  to  about 
50,000,000  francs.  But  the  organization  was  not  as  yet 
paying  the  Government,  and  in  reality  the  period  from 
1852  to  1854  had  not  been  at  all  favorable.  Bad 
harvests,  the  war,  numerous  issues  of  securities,  among 
others  railroad  obHgations,  had  increased  the  rate  of 
interest  and  made  the  placing  of  the  Credit  Foncier 
obligations  very  difficult.  The  annuity  was  increased 
successively  from  5  francs  to  5.44  francs,  5.65  francs, 
5.95  francs,  and  6.06  francs. 

In  order  to  remedy  a  situation  which  was  due  only  to 
chance  circumstances,  a  system  of  monopoly  with  state 
control  was  instituted,  and  on  July  6,  1854,  a  decree 
bestowed  on  the  Credit  Foncier  de  France  an  organiza- 
tion similar  to  the  one  of  the  Bank  of  France.  At  the 
head  of  this  establishment  were  placed  a  governor  and 
two  deputy  governors,  named  by  the  Emperor.  The 
maximum  rates  imposed  on  the  rates  of  the  annuity  by 


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National      Monetary       Commission 


Evolution     of    Credit     and     Banks 


the  preceding  decrees  were  suppressed.  The  fact  was  at 
last  recognized  that  the  rate  of  interest  is  not  a  thing  to 
be  fixed  by  decree.  This  institution  was  placed  in  reality 
under  the  department  of  the  Minister  of  Finance,  and 
controlled  by  his  representatives. 

This  regime  has  not  been  changed  in  its  fundamental 
points. 

The  governor  is  named  by  the  President  of  the  Re- 
pubhc,  Ukewise  the  two  deputy  governors. 

The  board  of  directors,  composed  of  20  members,  is 
named  by  the  general  assembly  of  the  stockholders. 

The  censors,  three  in  number,  are  also  named  by  the 
general  assembly. 

It  is  this  combined  authority — state  inspection  and 
the  supervision  of  the  general  assembly  of  stockholders — 
that  directs  the  operations  of  the  Credit  Foncier. 

II. 

The  principle  on  which  land  loans  are  based  is  that 
capital  of  this  kind  can  be  reimbursed  but  slowly.  It  is 
necessary,  therefore,  to  make  loans  for  a  long  term,  and 
tie  up  capital  for  a  certain  time,  and  assure  its  partial 
return  each  year  by  a  regular  sinking  fimd.  It  is  also 
important  to  have  new  capital  available  when  it  is  needed, 
since  the  annuities  collected  each  year  must  be  devoted 
in  part  to  a  special  use.  The  Credit  Foncier,  in  order  to 
procure  this  capital,  issues  obhgations  on  which  it  pays  a 
rather  small  interest,  for  the  reason  that  these  obhgations 
are  issued  with  prizes.  The  bearers  of  obhgations  have  the 
chance  of  winning  prizes.  This  attracts  purchasers,  and 
the  obligations  are  easily  placed.    The  Credit  Foncier  uses 

246 


4 
♦^^ 


as  an  amortizement  for  its  borrowings  the  annuities  that  it 
receives  from  its  debtors.  This  amortizement  is  so  planned 
that  there  is  a  rotation  between  the  amortizement,  the  pay- 
ment of  annuities,  and  fresh  borrowings.  Capital  here 
changes  hands  more  slowly  than  in  an  ordinary  bank,  but 
it  circulates,  one  might  say,  automatically.  There  is, 
then,  according  to  the  needs,  a  demand  for  capital,  and  in 
proportion  to  the  size  of  the  sums  borrowed  by  the  Credit 
Foncier,  an  amortizement  of  this  capital.  Finally,  a  thing 
that  we  must  bear  in  mind  is  that  the  obligation  of  the 
land  credit,  which  in  reality  represents  a  lien  on  "immov- 
able" property,  becomes  "movable"  property  which 
may  be  transferred  and  sold  like  all  securities  of  this 
kind. 

The  mechanism  is  ingenious  and  simple;  it  acts  auto- 
matically and  regularly.  But  if  the  tool  is  fitted  to  the 
work  it  has  to  do,  it  must  be  added  that  the  difficulty  of 
the  case  in  point  is  not  to  find  capital  and  a  scheme  for 
its  amortizement,  but  to  know  how  to  lend  this  capital 
wisely,  and  to  debtors  who  will  be  able  to  keep  their 
engagements;  then  it  is  important  not  to  loan  on  real 
estate  that  is  likely  to  depreciate  to  any  great  extent, 
and  to  measure  the  loan  by  the  property  that  secures  it. 
Here  is  the  chief  difficulty,  and  it  is  in  this  connection 
that  the  question  arises:  Should  a  land  credit  company 
be  centralized,  especially  when  it  is  in  a  country  with 
diverse  and  varying  regions  as  to  land,  cultivation,  indus- 
try, and  density  of  population?  Is  it  possible  by  sending 
agents  from  a  distant  central  point  to  make  sure  of  the 
approximate  value  of  real  estate?    The  Credit  Foncier  de 


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Evolution     of    Credit     and     Banks 


I 


'm 


.1 


France  seems  to  have  succeeded  in  doing  so,  in  the  main 
because  the  loans  are  principally  on  cify  buildings  and 
town  lots.  But  in  countries  of  wide  area  where  the 
regions  are  imlike  and  where  it  needs  an  intimate  knowl- 
edge of  the  locality  in  order  to  make  investments  with 
as  little  risk  as  possible,  centralization  is  certainly  not  a 
method  to  be  recommended. 

There  is  furthermore  another  field  into  which  the  Credit 
Foncier  de  France  branches  out.  It  has,  in  fact,  been  au- 
thorized (by  the  decrees  of  July  6,  i860,  and  February 
28,  1862)  to  make  loans  to  communes,  departments, 
syndical  associations,  etc.,  with  or  without  landed  security. 
In  the  matter  of  commimal  loans,  especially,  the  company 
is  almost  sure  to  be  paid  regularly  and  its  pledge  consists 
of  the  additional  communal  tax,  the  extra  centimes 
voted  by  the  town  coimcil  to  secure  the  loan.  Properly 
speaking,  then,  this  is  not  a  question  of  land  credit. 
These  loans  are  made  on  special  issues  of  communal  obli- 
gations, whereas  the  issues  for  ordinary  mortgage  loans 
consist  of  land  obligations. 

Other  decrees  enlarged  the  scope  of  its  activity.  The 
act  of  January  11,  i860,  had  already  extended  its  privi- 
leges to  Algeria,  and  the  same  year  the  law  of  May  19 
had  substituted  it  for  the  Comptoir  d'Escompte  in  the 
operations  of  this  establishment  with  the  Sous-comptoir 
des  Entrepreneurs,  an  institution  which  made  loans  on 
building  lots  or  on  houses  in  process  of  construction. 

Then  the  Credit  Foncier  created  a  joint-stock  company 
which  was  legally  independent,  but  was  in  fact  affihated 
with  the  parent  concern,  and  dependent  upon  it,  since 


248 


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it  was  tmder  the  same  management.  This  association  was 
called  the  Credit  Agricole.  It  was  chartered  by  the  decree 
of  February  16,  1861,  and  began  operations  April  i  of  the 
same  year. 

The  aims  of  this  society  were  as  follows:  To  procure 
capital  or  credit  for  agriculture  and  the  industries  con- 
nected with  it,  by  making  or  facilitating  by  its  guaranty 
the  discount  or  negotiation  of  effects  payable  at  the  latest 
in  ninety  days;  to  open  credits  or  loans  for  a  longer  period, 
but  without  exceeding  three  years,  on  pledge  (nantisse- 
ment)  or  any  other  special  security;  to  receive  deposits 
with  or  without  interest,  not  exceeding  twice  the  capital 
in  cash  or  represented  by  securities  placed  in  the  com- 
pany's safe;  to  open  running  accounts,  make  collections, 
to  carry  on,  with  government  sanction,  all  other  oper- 
ations which  aim  at  helping  the  clearing  and  improving 
of  the  soil,  etc.,  and  the  development  of  agriculture. 

But  the  Credit  Agricole,  whose  object  was  supposedly  to 
help  French  agriculture,  thought  proper  to  loan  a  large 
sum — 1 68 ,000,000  francs — to  the  Khedive  of  Egypt.  This 
unfortimate  speculation  was  on  the  point  of  bankrupting 
the  company  in  1876  when  the  Credit  Foncier  absorbed 
the  concern  and  straightened  out  its  business  as  best  it 
could,  not,  however,  without  losses  to  the  amotmt  of 
something  like  9,000,000  francs. 

As  a  result  of  uniting  with  the  establishments  we  have 
mentioned,  the  Credit  Foncier  had  increased  its  capital 
successively  to  60,000,000  francs,  and  at  the  end  of  1869  to 
90,000,000  francs.  But  this  was  only  a  nominal  figure, 
since  the  500-franc  shares  had  been  sold  for  only  250  francs. 


249 


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N  ational      Monetary      Commission 

When  it  took  over  the  Banque  Hypothecaire — a  joint-stock 
company  founded  in  1879,  but  without  the  privileges  of 
the  larger  concern — its  capital  was  increased  to  1 55,000,000 
francs.     It  is  today  200,000,000  francs. 

III. 

The  Credit  Foncier  had  from  the  beginning  seen  its 
rate  of  interest  on  loans  regulated  by  the  public  authori- 
ties. The  stupidity  of  this  measure  was  soon  perceived. 
It  became  free  to  follow  the  law  of  supply  and  demand 
for  capital  in  this  direction,  that  is  to  say,  for  capital 
to  be  used  in  land  investments.  It  made  loans,  then, 
at  5  per  cent  and  over.  But  the  lowering  of  the  interest 
rate  on  capital  in  general  was  especially  evident  after 
the  war  of  1870-71.  The  Credit  Foncier  was  not  long 
in  feeHng  the  effects  of  this.  Its  debtors  had,  according 
to  contract,  the  right  to  anticipate  the  payments  of  their 
loans,  and  they  took  advantage  of  this  right  on  a  large 
scale  beginning  with  1875.  'The  city  of  Paris  was  its 
debtor  for  the  sum  of  283,000,000  francs,  redeemable  in 
28  annuities.  Seeing  the  state  of  the  money  market,  the 
city  could  lessen  its  expense  and  find  money  at  a  cheaper 
rate.  It  had,  therefore,  the  easy  alternative  of  reim- 
bursmg  the  Credit  Foncier.  This  establishment  did  not 
allow  other  debtors  to  operate  conversions  in  this  way, 
but  proceeded  to  make  them  on  its  own  account. 

A  loan  of  500,000,000  francs  in  commimal  obligations  was 
issued  by  the  Credit  Foncier  on  August  5,  1879.  Shortly 
after,  in  September,  1879,  another  loan  of  900,000,000 
francs  in  land  obligations  was  subscribed  for  with  equal 
success.     The  Credit  Foncier,  which  had  been  loaning  its 

250 


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Evolution     of    Credit     and     Banks 

fimds  to  the  city  of  Paris  at  5.15  per  cent  before  this 
conversion,  now  charged  slightly  less  than  4  per  cent  or 
fully  I  per  cent  less. 

The  rate  of  interest  was  also  lowered  for  ordinary  mort- 
gage loans  made  to  private  individuals.  Besides,  the  two 
kinds  of  operations  of  the  Credit  Foncier  have  special 
funds  that  have  been  borrowed  for  the  loans  of  each  of 
these  branches  separately;  money  borrowed  on  municipal 
obligations  is  appHed  to  making  loans  to  towns,  syndi- 
cates, etc.,  and  money  raised  on  land  securities  is  used  for 
land  loans  to  private  individuals. 

The  lowering  of  the  rate  of  interest  increased  the  opera- 
tions of  this  estabHshment.  Beginning  with  1882  it  loaned 
to  private  individuals  and  towns  394,000,000  francs.  In 
1883  the  total  was  nearly  300,000,000. 

It  makes  loans  of  two  descriptions : 

1.  Mortgage  loans  for  long  periods  with  amortizement; 
the  period  may  be  from  ten  to  seventy-five  years,  according 
to  the  plan  chosen.  The  borrower  may  clear  himself  by 
advance  payments.  The  interest  on  these  loans  is  4.30 
per  cent  at  the  present  moment,  without  commission. 

2.  Loans  on  mortgages  for  a  short  date  without  amor- 
tizement ;  these  are  for  periods  of  from  one  to  nine  years. 
The  interest  is  4.30  per  cent,  without  commission;  the 
borrower  can  not  make  advance  payments. 

The  Credit  Foncier  loans  to  the  amount  of  half  the 
value  of  the  property,  if  it  is  a  question  of  houses  or  arable 
lands,  etc.,  and  up  to  a  third  of  the  value  if  the  loan  is 
on  woods  and  vineyards.  This  is  easily  explained.  The 
woods  may  be  cut  down  or  destroyed  by  fire,  the  vines 


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N  ational      Monetary      Commission 

ravaged  by  phyloxera,  mildew,  etc.  As  for  buildings  of 
factories  or  mills,  they  are  appraised  only  for  their  value 
taken  apart  from  their  industrial  use. 

The  Credit  Foncier  loans  to  communes,  departments, 
and  pubHc  estabhshments  with  or  without  amortizement. 
The  rate  of  interest  is  3.85  per  cent  for  towns  and  depart- 
ments, and  4.10  per  cent  for  pubHc  estabhshments. 

Here  are  the  statistics  for  loans  on  mortgages  since 
the  founding  of  the  Credit  Foncier,  taken  in  ten-year 
periods  except  for  the  last,  which  comprises  the  years 
1905  to  1907,  or  three  years. 


Period. 


1843-1854 
1855-1874 
1875-1884 
1885-1894 
1895-1904 
1905-1907 


Number 
of  loans. 


8,861 

".571 
33.26a 

36.914 
44.019 
13,898 


Total  of  loans. 


Francs. 

546,300,000 

648,900,  000 

I. 555.000,000 

I. 194.800,000 

I, 244, 700,000 

388, 300.000 


The  total  of  these  loans  from  the  time  of  the  founding 
of  the  Credit  Foncier  amounts  to  5,577,000,000  francs, 
out  of  which  2,073,000,000  francs  are  still  due. 

The  following  are  the  statistics  of  the  commimal  loans 
authorized  by  the  law  of  July  6,  i860. 


Period. 


1860-1870 
1871-1880 
1881-1890 
1891-1900 
1901-1907 


Number 
of  loans. 


1,  366 

998 

14.313 

9.951 

9.832 


Total  of  loans. 


Francs. 
693,000,000 

505, 000, 000 

770,000.000 

1,  040,  000, 000 

678,  700.000 


252 


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Evolution     of    Credit     and     Banks 

The  total  of  communal  loans  since  the  decree  of  i860 
is  3,687,000,000  francs.  The  CrMit  Foncier  has  col- 
lected 1,895,000,000  francs,  and  there  are  still  due  it 
1,792,000,000  francs. 

The  Credit  Foncier  has  borrowed  money,  and  still 
borrows,  according  to  its  needs,  by  means  of  issues  of 
obhgations  with  prizes.  These  are  land  obligations  if 
they  are  issued  for  mortgage  loans,  and  communal  obliga- 
tions if  they  are  issued  for  town  or  department  loans. 

These  issues  of  the  Credit  Foncier  for  land  loans  (land 
obligations)  have  a  rather  slow  amortizement. 

Thus  the  loan  of  1879  (3  P^''  cent  land  obhgations)  is 
payable  at  the  latest  in  sixty  years;  issue  of  loan  of  1883 
(land  obhgations),  3  per  cent,  in  ninety-eight  years;  of 
1885  (land  obligations),  2.6  per  cent,  in  ninety-five  years; 
of  1895  (land  obhgations),  2.8  per  cent,  in  seventy-five 
years;  of  1903  (land  obhgations),  3  per  cent,  in  seventy- 
five  years;  of  1909  (land  obligations) ,  3  per  cent,  in  seventy 
years. 

For  the  last  ten  years  or  so  it  is  seen  that  the  time  of 
reimbursement  tends  to  decrease.  As  for  the  rate,  it  is 
seen  that  after  issues  made  below  3  per  cent  from  1885  to 
1895,  the  last  two  loans  (land  obligations)  have  been  at  3 
per  cent. 

For  communal  loans  the  rates  and  duration  of  amortize- 
ments are  as  follows:  Loan  of  1879  (municipal  obhga- 
tions), 2.6  per  cent,  payable  in  sixty  years;  of  1880  (mu- 
nicipal obhgations),  3  per  cent,  payable  in  sixty  years;  of 
1 89 1  (mimicipal  obligations) ,  3  per  cent,  payable  in  seventy- 
five  years;    of  1892  (municipal  obligations),  2.6  per  cent, 


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National      Monetary      Commission 

payable  in  seventy-five  years;  of  1899  (municipal  obliga- 
tions), 2.6  per  cent,  payable  in  seventy-five  years;  of  1906 
(municipal  obligations) ,  3  per  cent,  payable  in  ninety  years. 

The  obligations  of  the  Credit  Foncier  are  very  popular 
with  the  pubUc. 

The  establishment  is  wisely  administered  and  answers 
certain  well-defined  needs  in  the  country.  It  has  greatly 
helped,  both  by  its  land  loans  and  its  communal  loans,  in 
the  improvement  of  towns,  because  of  the  aid  it  gives 
private  individuals  in  their  building  operations,  as  well 
as  by  making  it  possible  for  towns  to  undertake  public 
works  and  improve  surroimding  conditions. 

Here  are,  in  addition,  the  dividends  distributed  in  the 
last  few  fiscal  years: 

Francs. 

1903 - - 27 

1904 - _ 27 

1905 28 

1906 28 

1907 30 

Let  us  add  that  the  Credit  Foncier  uses  its  free  funds  in 
discounting  commercial  paper  and  making  collateral  loans. 
On  December  31,  1907,  the  various  bills  and  securities 
figured  in  its  balance  sheet  for  182,000,000  francs,  and  its 
collateral  loans  for  more  than  37,000,000  francs. 

Its  debtors  owed  the  Company  on  December  31,  1907 —  Francs. 

Mortgage  loans 2,  103,  800,  000 

Communal  loans _  i,  788,  500, 000 

3,  892,  300, 000 

It  had  in  circulation  at  this  date — 

Land  obligations 2, 021,  000,  000 

Communal  obligations 1,612,  900, 000 

3.  633,  900, 000 


254 


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/ 


Appendix  II.— Note  on  the  Cridit  Agricole  Mutuel. 

Societies  of  the  Rayneri-Rostand  type.— Durand  banks.— Law  of  November  5, 
1894.  Creation  of  local  banks  of  agricultural  credit.— Causes  of  their  lack  of  suc- 
cess.—Law  of  March  31, 1899.  Founding  of  district  banks.— Condition  of  the  local 
and  district  banks.— Liability  of  the  members.— Rates  on  loans. 

On  the  outskirts,  so  to  speak,  of  the  general  organiza- 
tion of  banks  and  credit  in  France,  a  more  speciahzed 
and  less  ambitious  business  than  that  we  have  studied  in 
this  treatise  is  carried  on  in  the  so-called  Credit  Agri- 
cole  Mutuel  banks.  We  must  not  confound  them  with  the 
Socidt^  du  Credit  Agricole,  related  to  the  Credit  Foncier, 
the  workings  and  the  ill  luck  of  which  have  been  set 
forth  in  Appendix  I.  The  object  of  the  one  and  the 
others  is  indeed  to  make  loans  to  agriculttire ;  but  while 
the  Credit  Agricole  (related  to  the  Credit  Foncier)  made 
loans  at  very  long  terms  of  payment,  to  be  used  on  land 
improvements  the  outcome  of  which  was  more  or  less 
in  the  distant  future,  the  banks  of  the  Credit  Agricole 
Mutuel  grant  much  smaller  loans,  with  much  shorter 
terms  of  maturity,  and  in  order  to  meet  immediate  ex- 
penses. The  transformation  of  capital  arising  from  this 
last  form  of  loans  must  in  principle  be  much  quicker,  and 
the  repayment,  for  the  same  reason,  Hkewise  quicker. 

The  characteristic  of  the  Credit  Agricole  Mutuel  is  to 
give  a  mutual  basis  to  credit;  to  offer  as  security  to  the 
lender  the  joint  responsibility  of  a  company  of  people. 
Its  existence  and  development  are.  closely  bound  up  with 

255 


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National      Monetary      Commission 

the  laws  sanctioning  groups  of  individuals  and  with  the 
progress  of  the  spirit  of  association  and  soHdarity.  This 
explains  the  rather  late  appearance  in  France  of  a  form 
of  credit  institution  which  had  already  been  working  in 
Germany  since  the  middle  of  the  nineteenth  century — 
we  mean  the  Raiffaisen  and  Schulze  DeHtzsch  banks. 

It  is  only  after  the  law  of  March  21,  1884,  organizing 
professional  syndicates,  was  put  into  effect  that  we  see 
the  beginnings  of  the  organization  of  the  Credit  Mutuel. 
After  various  gropings  about  and  a  few  setbacks — with- 
out serious  material  detriment,  since  it  was  all  experi- 
mental— we  see  a  whole  series  of  banks  taking  shape, 
which  we  can  class  vmder  three  chief  types:  (i)  The 
Socidt^  Cooperative  de  Credit  Mutuel  de  V  Arrondissement 
dePoligny  (Jura);  (2)  the  societies  of  the  Rayneri-Rostand 
type;  (3)  the  Durand  banks. 

Soci^t^  Cooperative  de  Credit  Mutuel  de  I'Arron- 
dissement  de  Pohgny  was  founded  in  1885  with  a  capital 
of  20,000  francs  divided  into  500-franc  shares.  It  was 
regulated  by  the  law  of  July  24,  1867,  on  societies  with 
variable  capital.  It  lent  only  to  its  members;  the  maxi- 
mum of  credit  for  each  member  was  limited  to  600  francs; 
the  loan  was  made  for  three  months  with  privilege  of 
renewal  up  to  a  year;  the  borrower  had  to  furnish  surety. 
He  signed  a  note  to  the  order  of  the  society;  the  siwety 
gave  his  indorsement  on  this  note;  the  society  added  its 
signatiure  and,  bearing  these  three  signatures,  the  note 
was  presented  for  discount  at  the  branch  office  of  the 
Bank  of  France  at  Lons-le-Saulnier.  The  interest  rate 
on  the  loan  was  higher  by  i  per  cent  than  the  discount 


256 


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Evolution     of    Credit     and     Banks 

rate  of  the  Bank.  The  Poligny  Bank  was  imitated  by 
five  or  six  other  banks  started  about  the  same  time.  Its 
statutes  are  models  of  prudence. 

Societies  of  the  Rayneri-Rostand  type  are  rather  more 
numerous;  there  are  about  60  of  them.  They  meet  a 
demand  for  a  more  complete  and  widespread  organiza- 
tion than  do  societies  like  the  Poligny  cooperative  banks. 
They  are  under  the  influenc  of  the  "  Federative  Center  of 
Popular  Credit "  {Centre  Fediratif  du  Credit  Populaire),  an 
organ  of  propaganda,  having  headquarters  at  Marseilles 
and  fotmded  on  the  initiative  of  MM.  Rayneri  and  Rostand. 
This  federative  center  continues  the  work  begun  by  the 
"Society  for  the  promoting  of  popular  credit,"  started  by 
Father  Ludovic  de  Besse.  Hence  its  origins,  if  not  its 
tendencies,  are  ecclesiastical.  It  must  be  said  that  the 
banks  of  Rayneri  and  Rostand  try — even  if  they  do  not 
always  succeed — ^to  observe  absolute  neutrality  in  regard 
to  religion  as  well  as  politics. 

The  "Centre  F^d^ratif"  plays  the  part  of  adviser  to 
the  banks.  These  latter  are  perfectly  free  in  their  choice 
of  method  in  realizing  credit,  and  they  follow  their  own 
interest,  which  is  to  adapt  themselves  to  the  special  con- 
ditions of  the  environment  in  which  they  operate.  They 
are  encouraged  by  the  State,  and  they  organize  and 
govern  themselves  as  they  please.  Most  of  them  act 
in  concert  with  the  agricultural  syndicates.  The  Centre 
F^d^ratif  has  tried  to  get  the  savings  banks  to  use  for 
the  advantage  of  local  and  regional  federated  banks  the 
privilege  given  them  by  the  law  of  July  20,  1895,  of  loan- 
ing part  of  their  money  to  credit  companies. 


I97I — JD- 


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National      Monetary      Commission 

Finally,  the  Diirand  banks  have  a  very  clearly  defined 
ecclesiastical  character;  most  of  them  are  administered 
by  the  Catholic  clergy.  Their  foimder,  M.  Durand,  a 
lawyer  of  Lyons,  adopted  in  their  entirety  the  principles 
of  the  Raffaisen  banks  of  Germany,  which  are  also  purely 
ecclesiastical.  They  are  based  on  the  united  and  unlim- 
ited responsibility  of  all  their  members;  they  have  no 
capital  stock  and  borrow  only  the  fimds  strictly  necessary 
for  loans  and  in  proportion  as  loans  are  made.  They 
lend  to  the  members  alone  and  for  a  maximum  term  of 
five  years.  Their  resources  come  either  from  savings 
deposits  to  a  small  extent  or  from  donations  or  legacies 
inspired  by  a  feeling  of  beneficence  and  philanthropy. 

There  are  about  a  thousand  Dtu-and  banks.  The 
average  amount  they  loan  is  370  francs,  which  shows 
that  their  clientele  is  especially  made  up  of  small  farmers. 

On  this  organization  of  popular  credit,  due  to  private 
initiative,  has  been  grafted  an  official  organization,  fol- 
lowing the  law  of  November  5,  1894.  The  aim  of  the 
lawmaker  was  to  coordinate  all  these  efforts,  to  extend 
them  by  combining  them  with  the  effort  of  syndicate 
organization,  and  to  develop  these  two  institutions,  one 
through  the  other,  by  making  them  strictly  and  jointly 
liable. 

So,  then,  the  law  of  November  5,  1894,  sanctions  the 
union  of  credit  banks  and  agricultural  syndicates.  A 
priori  this. union'  might  be  fruitful;  each  member  of  a 
syndicate  being  in  principle  a  cooperator,  it  is  easier  to 
make  him  go  in  for  mutual  credit.  On  the  other  hand, 
one  of  the  chief  functions  of  agricultural  syndicates  is  to 


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/ 


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furnish  their  members  with  fertilizers,  seeds,  machines, 
utensils,  etc.,  sometimes  even  with  the  live  stock  needed 
for  farming.  Consequently  the  loan  from  the  Credit 
Agricole  will  most  often  be  used  in  paying  for  these  pur- 
chases. So  there  will  be  the  certainty  that  the  funds 
loaned  will  be  well  employed  to  productive  ends,  which 
increases  the  guaranty  of  repayment.  Finally,  the  fact 
that  the  borrower  belongs  to  an  agricultural  syndicate  is 
a  guaranty  that  it  is  really  a  farmer  who  is  being  bene- 
fited by  the  credit  accommodation  that  people  have 
tried  to  provide. 

The  law  of  1894  minimizes  the  formalities  and  expenses 
necessitated  by  the  creation  of  a  bank  of  agricultural 
credit.  It  can  be  started  with  or  without  capital.  In  the 
latter  case,  it  must  stipulate  the  imlimited  liability  of  its 
members,  whether  it  operate  under  a  firm  name  or  as  a 
joint-stock  company.  If  there  is  a  capital,  all  of  it  must 
be  subscribed  and  at  least  a  quarter  of  it  paid  in.  With 
certain  reservations,  the  societies  have  perfect  freedom 
in  drawing  up  their  statutes;  they  may  lend  only  to 
agricultural  enterprises— they  do  not  distribute  any 
dividends;  the  personal  shares  receive  a  fixed  interest. 
However,  at  the  end  of  the  year  they  may  pay  back  to 
their  clients  a  quarter,  at  most,  of  the  profits,  prorated 
according  to  the  business  their  clients  have  done  with 
the  company.  The  other  three-quarters  are  paid  into  a 
reserve  fund. 

Except  for  these  restrictions  the  framers  of  the  stat- 
utes are  perfectly  free  in  organizing,  administering,  and 
determining  the  conditions  of  dissolving  the  company, 


259 


National      Monetary      Commission 

of  widening  its  field  of  action,  or  limiting  the  responsi- 
bility of  its  partners. 

Such  as  it  is,  the  law  of  November  5, 1894,  lends  itself  to 
the  introduction  into  France  of  the  various  kinds  of  agri- 
cultural credit  societies.  Its  terms  are  very  broad.  As 
we  said  in  the  beginning,  it  brought  no  innovations;  it 
aimed  merely  to  give  an  official  and  regular  cast  to  the 
movement  already  started  by  private  initiative,  which  had 
overstepped  a  little  the  bounds  set  by  the  lawmaker  of 
1884  to  the  activity  of  professional  syndicates.  In  spite 
of  this  patronage  the  success  was  not  remarkable.  Five 
years  after,  in  1899,  the  companies  founded  imder  the 
provisions  of  the  law  of  1894  numbered  only  83,  according 
to  statistics;  a  hundred  of  the  same  kind  had  been  cre- 
ated but  had  not  registered  their  statutes.  Alongside 
of  these,  a  thousand  banks  of  the  Durand  type,  or  the 
Rayneri  type,  and  a  few  autonomous  societies  were  con- 
tinuing to  do  business  with  their  old  constitutions. 

Why  were  these  agricultural  credit  banks  so  slow  to 
develop?  Because  their  private  capital  and  their  de- 
posits were  insufiicient.  It  is  not  enough  to  wish  to  ex- 
tend credit;  means  to  do  so  must  be  provided  at  the  same 
time.  Without  doubt  the  joint  guaranty  of  the  mem- 
bers and  all  the  other  kinds  of  guaranties  which  we  have 
enumerated  above  were  of  such  a  nature  as  to  facilitate 
the  borrowings  of  local  banks.  But  borrowing  from 
whom?  There  are  involved  here  loans  of  long  and  very 
imcertain  maturities,  according  to  the  district.  The  risk 
is  greater  and  of  a  different  kind  from  that  on  the  dis- 
coimt  of  ordinary  commercial  paper.     The  commercial 


260 


^O!^ 


I 


Evolution     of    Credit     and     Banks 

bill  represents  a  value  already  created,  and  you  only 
have  to  wait  to  realize  on  it;  the  note  of  the  credit  bank 
represents  a  value  still  to  be  created;  that  is  to  say,  a 
value  subject  to  all  the  uncertainties  of  production  and 
sale — uncertainties  especially  numerous  where  it  is  a 
question  of  agricultural  products.  So  means  had  to 
be  found  to  facihtate  the  discount  of  the  paper  of  local 
banks  if  the  movement  was  to  progress  at  all;  a  second 
story  had  to  be  added  to  the  building,  hence  the  law 
of  March  31,  1899. 

We  have  said  in  our  general  study  that  the  State  had 
demanded  from  the  Bank  of  France,  as  the  price  for  re- 
newing its  privilege  in  1897,  a  gratuitous  loan  of  40,000,000 
francs  and  an  annual  royalty  equal  to  the  proceeds  of  one- 
eighth  of  the  discount  rate  multipUed  by  the  figure  of  the 
productive  circulation,  the  payment  not  to  amoimt  to  less 
than  2,000,000  francs.  These  two  sources  of  income  are 
going  to  be  used  for  establishing  discount  funds  for  the 
credit  banks. 

To  this  end  the  law  provided  for  the  establishment  of 
district  banks  patterned  on  local  banks,  but  with  functions 
more  clearly  defined.  The  district  bank,  Uke  the  bank 
of  the  first  degree,  rests  on  the  principle  of  mutuality; 
money-making  is  not  its  aim  nor  dividing  of  profits, 
except  among  its  cHents  in  proportion  to  their  dealings 
with  it.  It  receives  gratuitous  and  temporary  loans  from 
the  State,  the  conferring  of  which  is  made  every  year  by 
a  distributing  committee  composed  of  senators,  deputies, 
bank  representatives,  the  governor  of  the  Bank  of  France, 
etc.     These  loans  must  not,  as  a  matter  of  principle, 


s6i 


1 


National      Monetary      Commission 

exceed  a  fourth  of  the  capital  paid  in  by  the  stockholders 
of  the  district  bank;  they  are  made  for  a  term  of  five 
years,  with  the  possibility  of  renewal.  The  district  bank 
is  authorized  to  receive  deposits  in  the  form  of  running 
accounts,  and  to  issue  notes,  the  total  of  which  may  not 
exceed  three-fourths  of  the  sum  total  of  its  discounts. 
This  limitation  is  very  open  to  criticism;  the  total  of  the 
discounts  being  essentially  variable,  it  is  very  difl&cult  to 
keep  to  this  clause ;  the  most  one  can  do  is  to  accept  it  as 
prudent  advice  to  bear  in  mind. 

Finally  another  resource  not  mentioned  in  the  law, 
which  nevertheless  is  one  of  the  principal  elements  of  the 
work  carried  on  by  the  district  banks,  is  the  rediscount 
of  bills  indorsed  by  the  local  banks.  Besides  discounting 
these  bills,  they  can  make  direct  loans  to  the  local  banks 
for  the  formation  of  their  working  capital.  These  are  the 
only  two  operations  allowed  them.  The  district  banks  do 
not  lend  directly  to  the  farmers;  they  have  relations  only 
with  their  afl&liated  local  banks.  Borrowers  go  to  the 
local  banks. 

A  special  department,  "department  of  mutual  agri- 
culttiral  credit  and  cooperation,"  established  by  the 
Government  Board  of  Agriculture  imdertakes  to  watch 
over  the  workings  of  this  organization  of  credit  of  the 
second  degree.  It  makes  a  report  every  year  to  the 
President  of  the  RepubUc  on  the  condition  of  the  district 
and  local  banks.  We  give  below  a  few  items  taken  from 
the  last  report: 


Sdf 


Xs 


f 


Evolution     of    Credit     and     Banks 


1 

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^    Cd 

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n 

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\l 


1 


National      Monetary      Commission 

The  number  of  district  banks  increased  from  21  in  1901 
to  88  in  1907;  their  paid-in  capital  from  2,927,000  francs 
to  9,015,000  francs;  the  state  loans  reached  28,628,000 
francs  in  1907;  loans  to  local  banks,  1,827,000 francs;  dis- 
coimting  operations,  including  renewals,  79,888,000  francs; 
their  reserves,  1,481,000  francs;  general  expenses,  194,000 
francs,  or  0.28  per  cent  of  the  sum  total  of  transactions. 
In  1907  they  received  6,825,000  francs  in  deposits  with 
an  average  balance  of  600,000  to  800,000  francs. 

But  the  progress  made  by  the  local  banks  is  more  inter- 
esting because  they  distribute  credit.  Their  number  in- 
creased from  309  in  1901  to  2,168  in  1907;  their  members 
from  7,998  to  96,122;  the  paid-in  capital  was  5,654,000 
francs  in  1907;  the  loans  accepted  in  the  same  year 
70,708,000  francs,  of  which  10,000,000  francs  went  to 
cooperative  production  companies,  especially  dairies,  and 
to  agricultural  syndicates;  the  reserve  reached  739,000 
francs,  and  the  current  loans  on  December  31,  1907,  were 
30,452,000  francs. 

The  law  of  1894  rightly  allowed  the  foimders  every 
liberty  in  regard  to  the  liability  of  the  members;  in  three- 
fourths  of  the  banks  this  hability  is  Hmited  either  to  the 
shares  subscribed,  or  to  a  multiple,  or  to  the  value  of  the 
harvest  of  each  member,  or  to  his  capacity  for  credit;  each 
district  has  adopted  the  system  best  suited  to  it.  In  the 
south  especially  most  of  the  banks  have  adopted  the  prin- 
ciple of  unlimited  liability  of  all  the  co-members  of  the  same 
local  bank ;  this  obtains  particularly  for  almost  all  the  local 
banks  affiliated  with  the  district  bank  of  the  south,  which 
has  its  headquarters  at  Montpellier.     Efforts  are  being 


264 


-4^ 


\ 


t 


1 


/ 


ii" 


Evolution     of    Credit    and     Banks 

made  to  generalize  this  principle  which  procures  a  wide 
credit  for  the  companies  which  adopt  it. 

The  tendency  at  the  beginning,  in  local  as  well  as  dis- 
trict banks,  was  to  allow  loans  at  an  interest  rate  lower 
than  the  ordinary  market  rate.  It  was  a  serious  economic 
mistake  which  resulted  in  placing  these  banks  and  their 
borrowers  in  an  abnormal  and  hence  a  dangerous  situa- 
tion. It  ought  to  have  been  foreseen  that  when  the  gratui- 
tous loans  of  the  State  could  no  longer  be  continued,  the 
whole  system  would  have  to  be  changed  at  the  risk  of 
compromising  the  prosperity  of  these  institutions.  In  the 
mind  of  the  lawmaker,  the  object  of  the  credit  banks  was 
especially  to  act  as  intermediary  between  the  farmer  and 
the  Bank  of  France,  to  educate  him  in  commercial  practices, 
and  to  teach  him  to  use  credit.  Now,  in  lowering  the 
interest  on  money  below  the  market  rate,  the  borrower  was 
deceived  as  to  his  real  position  and  as  to  the  terms  which 
he  has  a  right  to  obtain ;  it  was  made  impossible  to  extend 
operations  and  render  more  kinds  of  service,  since  the  banks 
could  not  discount  their  paper  at  the  Bank  of  France  with- 
out loss. 

This  situation  was  pointed  out  in  the  report  to  the  Presi- 
dent of  the  Republic  for  the  year  1903.  Here  is  the  pas- 
sage from  this  report  in  which  the  credit  banks  are  advised 
to  correct  their  methods: 

"The  Banks  must  face  the  possibility  of  the  total  or 
partial  cutting  off  of  the  State  loans,  and  anticipating 
this  event,  they  must  establish  large  reserve  funds  so  if  the 
case  demanded  they  could  increase  their  resources  and 
consequently  their  credit  and  their  power  of  discount  with 


265 


V 

Iw 


National      Monetary      Commission 

the  Bank  of  France  and  other  large  institutions.  An  ex- 
ample will  illustrate  more  clearly  the  situation  of  banks 
which  discount  below  the  normal  rate.  One  of  the  banks 
which  does  the  largest  business,  making  very  large  loans, 
has  been  able  to  place  in  reserve  after  running  three  years 
only  30,000  francs  or  so,  because  it  discounts  at  2  per  cent 
paper  which  it  could  not  pass  over  to  the  Bank  of  France 
without  losing  i  per  cent.  Other  banks  in  similar  cir- 
cumstances lose  from  1  yi  to  2  per  cent  when  they  are 
forced  to  procure  fimds  by  having  opened  for  themselves 
a  collateral  loan  account.  Consequently,  the  more  business 
they  do  beyond  a  certain  figure,  the  more  their  profits 
diminish.  It  is  the  opposite  of  what  happens  in  every  well- 
regulated  business,  where  the  relative  rate  of  general 
expenses  diminishes  in  proportion  as  business  increases." 

A  few  banks  have  paid  attention  to  these  observations 
and  changed  their  method  of  business  in  the  way  pointed 
out  to  them  by  the  inspectors  of  the  Ministry  of  Agricul- 
ture. Many  have  continued  to  give  rates  on  loans  lower 
than  the  normal  interest  rate. 

To  sum  up,  the  Credit  Agricole  was  organized  with  a 
real  privilege.  The  Bank  of  France  furnishes  capital  to 
the  State  gratuitously,  which  loans  it  in  the  same  way 
without  interest  to  district  organizations  of  rural  credit. 
These  latter  can  at  their  own  pleasure  lower  the  interest 
rate  and  compete  with  the  bankers  who  would  like  to  en- 
gage in  these  operations.  It  is  an  indirect  means  of  protec- 
tion. Has  it  brought  about  the  expected  results?  That 
is,  does  this  credit,  deliberately  made  cheap  by  capital 
which  does  not  pay  any  interest,  really  profit  the  small 


266 


) 


\Hmmm 


\ 


^ 


/ 


Evolution     of    Credit     and     Banks 

farmers  whom  it  was  meant  to  help?  In  some  localities 
this  end  has  been  attained,  at  least  in  part,  as  in  the  de- 
partments of  the  south  where  property  is  divided  because 
of  viticulture.  Besides,  the  crisis  which  has  been  severe  for 
several  years  past  in  these  regions,  has  led  the  vine  grow- 
ers to  deal  with  agricultural  credit  banks.  But  very  often, 
too,  the  cheapness  of  agricultural  credit  has  helped  the 
larger  farmers,  those  who,  better  equipped,  better  in- 
formed on  questions  of  credit,  have  really  no  need  for  this 
protection.  They  benefit  by  a  reduction  in  rate  of  inter- 
est for  which  the  Bank  of  France  in  the  last  analysis  bears 
all  the  burden,  since  this  reduction  is  only  made  possible 
by  the  gratuitous  loan  of  40,000,000  francs  which  the 
State  exacted  from  the  Bank  of  France  when  it  renewed 
its  privilege  in  1897. 


367 


I 


I 


Date  Due 


COLUMBIA  UNIVERS  TY  LIBRARIES 


s 


0041428358 


III 


I 


|fb$H  0(>%b 


\ 


\ 


NEH 


FEB2&199S 


*% 


{ 

I 

I 


V 


f 


JAN  "5    ^938 


L 


,  W-a^Oruin^t--" 


END  OF 
TITLE 


